UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 0-11560
SAVOIR TECHNOLOGY GROUP, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2414428
--------------- ---------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
254 E. HACIENDA AVENUE, CAMPBELL, CA
----------------------------------------
(Address of principal executive offices)
95008
--------
(Zip Code)
(408) 379-0177
-------------------
(Registrant's telephone number,
including area code)
N/A
------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 1999
----- ----------------------------
Common Stock $0.01 par value 12,927,127
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SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets at June 30, 1999 and December 31, 1998 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 23
PART II - OTHER INFORMATION 24
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
When used in this Report, the words "estimate," "project," "intend" and
"expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties that could
cause actual results to differ materially. For a discussion of certain such
risks, see "Factors That May Affect Future Results" on page . Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release updates or revisions to these statements.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
--------------------
<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- -------------------------------
1999 1998 1999 1998
--------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 201,687 $ 122,920 $ 370,256 $ 223,424
Cost of goods sold 179,282 108,031 328,758 195,474
--------------- --------------- -------------- -------------
Gross profit 22,405 14,889 41,498 27,950
--------------- --------------- -------------- -------------
Gross profit as % of sales 11.11% 12.11% 11.21% 12.51%
Selling, general and administrative expenses 15,446 10,627 29,073 19,853
--------------- --------------- -------------- -------------
Operating income 6,959 4,262 12,425 8,097
Interest expense 774 963 1,512 2,672
--------------- --------------- -------------- -------------
Income before income taxes and extraordinary item 6,185 3,299 10,913 5,425
Provision for income taxes 3,013 1,618 5,330 2,651
--------------- --------------- -------------- -------------
Income before extraordinary item 3,172 1,681 5,583 2,774
Extraordinary item, net of tax effect -- (2,338) -- (2,338)
--------------- --------------- -------------- -------------
Net income (loss) $ 3,172 $ (657) $ 5,583 $ 436
=============== =============== ============== =============
Net income (loss) per share:
Income before extraordinary item - basic $ 0.23 $ 0.16 $ 0.41 $ 0.28
Extraordinary item, net of tax effect -- (0.30) -- (0.34)
--------------- --------------- -------------- -------------
Net income (loss) - basic $ 0.23 $ (0.14) $ 0.41 $ (0.06)
=============== =============== ============== =============
Income before extraordinary item - diluted $ 0.21 $ 0.16 $ 0.38 $ 0.28
Extraordinary item, net of tax effect -- (0.22) -- (0.24)
--------------- --------------- -------------- -------------
Net income (loss) - diluted $ 0.21 $ (0.06) $ 0.38 $ 0.04
=============== =============== ============== =============
Number of shares used in per share calculations:
Basic 12,479 7,986 11,926 6,884
=============== =============== ============== =============
Diluted 15,359 10,747 14,845 9,738
=============== =============== ============== =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
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<TABLE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------------------- -------------------
<S> <C> <C>
(Unaudited)
Current Assets:
Cash $ 7,007 $ 5,820
Trade accounts receivable, net of allowance for doubtful
accounts of $997 at June 30, 1999 and $1,100 at
December 31, 1998 131,624 156,953
Inventories 33,727 38,913
Other current assets 25,966 16,017
------------------ -------------------
Total current assets 198,324 217,703
Property and equipment, net 7,947 5,526
Excess of cost over acquired net assets and other
intangibles, net 107,134 83,810
Other assets 2,267 1,863
------------------ -------------------
$ 315,672 $ 308,902
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 20,012 $ 21,240
Current portion of long-term debt 2,933 1,020
Accounts payable 151,748 171,021
Accrued expenses and other current liabilities 21,899 20,967
------------------ -------------------
Total current liabilities 196,592 214,248
Long-term debt, less current portion 4,288 1,087
Commitments and contingencies -- --
Stockholders' Equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; issued and outstanding: 1,986,500 shares
Series A at June 30, 1999 and December 31, 1998 and 10
shares of Series B at June 30, 1999 and December 31,
1998; liquidation preference of $18,996 at June 30, 1999
and December 31, 1998 20 20
Common Stock, $0.01 par value, 25,000,000 shares
authorized; issued and outstanding: 12,727,070 shares at
June 30, 1999 and 10,698,010 shares at December 31,
1998 127 107
Additional paid-in capital 110,780 91,810
Shareholder note receivable (2,513) --
Retained earnings 6,378 1,630
------------------ -------------------
Total stockholders' equity 114,792 93,567
------------------ -------------------
$ 315,672 $ 308,902
================== ===================
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
-------------------------------------
1999 1998
---------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,583 $ 436
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,479 2,761
Accretion on long-term debt obligations -- 732
Provision for doubtful accounts receivable 525 267
Gain on sale of fixed assets (2) --
Deferred taxes (279) 75
Write-off of unamortized warrant discount -- 2,773
Changes in assets and liabilities:
Accounts receivable 27,154 1,840
Inventories 5,137 (355)
Other current assets (8,969) (9,471)
Accounts payable (20,791) 887
Accrued expenses and other current liabilities 778 950
---------------- ----------------
Net cash provided by operating activities 13,615 895
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 10 --
Acquisition of businesses, net of cash acquired (7,477) (3,198)
Acquisition of other assets (856) (786)
Acquisition of property and equipment (2,321) (636)
---------------- ----------------
Net cash used in investing activities (10,644) (4,620)
---------------- ----------------
Cash flows from financing activities:
Proceeds from short-term borrowings 247,173 135,952
Payments on short-term borrowings (253,401) (124,747)
Proceeds from short-term loan 5,000 --
Payments on debt obligations (1,035) (32,516)
Proceeds from issuance of common stock -- 28,683
Payment of cash dividend on preferred stock (40) --
Proceeds from exercise of stock options and warrants 220 311
Proceeds from employee stock purchase plan 299 125
---------------- ----------------
Net cash (used in) provided by financing activities (1,784) 7,808
---------------- ----------------
Net increase in cash 1,187 4,083
Cash--beginning of period 5,820 2,919
---------------- ----------------
Cash--end of period $ 7,007 $ 7,002
================ ================
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
Note 1: The unaudited consolidated financial statements which include the
accounts of Savoir Technology Group, Inc. and its subsidiaries
(the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all information and
footnotes necessary to comply with generally accepted accounting
principles. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been
included. The consolidated statements of operations for the six
months ended June 30, 1999 are not necessarily indicative of the
results to be expected for a full year or for any other period.
The December 31, 1998 balance sheet was derived from audited
financial statements, but does not include all disclosures
required by generally accepted accounting principles. It is
suggested that these financial statements be read in conjunction
with the financial statements and the notes thereto included in
the Company's latest audited financial statements for the year
ended December 31, 1998.
Note 2: The Company has adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 131, "DISCLOSURES
AND SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
("SFAS 131").
The Company has two operating segments: the Mid-Range Systems
Division ("MRS") and the Computer and Peripherals Group ("CPG").
Products distributed by MRS includes mid-range servers that run on
UNIX, OS/400 and NT operating systems, peripheral equipment
(including wireless networking equipment, storage products,
printers and terminals) and software. Through CPG, the Company
offers its customers value-added systems integration services up
to, and including, installation (e.g., "turnkey" systems assembly
of departmental servers, workstations, hardware and software
"bundling" and light manufacturing). The accounting policies of
the segments are the same. Although management measures the
profitability of its business through the results of these two
segments, the Company's segments have similar economic
characteristics and, as such, the results of operations have been
aggregated and separate disclosure is not presented.
Foreign sales for the six months ended June 30, 1999 and 1998 were
approximately $16,935,000 and $3,105,000, respectively.
During the six months ended June 30, 1999 and 1998, approximately
75% of the Company's net sales were generated from the sale of IBM
products.
One customer accounted for approximately 14% and 20% of the
Company's net sales in the six months ended June 30, 1999 and
1998, respectively, and no other single customer accounted for
more than 10% of the Company's net sales.
Note 3: The Company has an inventory and working capital financing
agreement (the "IBMCC Credit Facility") with IBM Credit
Corporation ("IBMCC"), an affiliate of International Business
Machines Corporation ("IBM"), whereby purchases from IBM and cash
advances from IBMCC are directly charged to the IBMCC Credit
Facility and are paid by the Company based on payment terms
outlined in the agreement. Total borrowings under the IBMCC
Credit Facility are based on eligible accounts receivable and
inventory, as defined in the IBMCC Credit Facility, and are
limited to $125,000,000. The IBMCC Credit Facility expires on
August 31, 2000 and contains restrictive covenants which include
the maintenance of minimum current ratio, tangible net worth, net
profit after tax, EBITDA to fixed charges and times interest
earned ratio, as defined in the IBMCC Credit Facility, and is
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collateralized by substantially all assets of the Company. The
Company was not in compliance with the current ratio and tangible
net worth covenants at June 30, 1999. IBMCC granted a waiver as of
June 30, 1999 for these specific violations. There were no cash
advances under the IBMCC Credit Facility at June 30, 1999. Cash
advances bear interest at prime (7.75% at June 30, 1999) plus
1.875%. Based on eligible assets, as of June 30, 1999, the Company
had available borrowings of approximately $22,500,000.
Note 4: Revenue Recognition and Accounts Receivable: The Company records
revenue, net of allowances for estimated returns, at the time of
product shipment. To reduce credit risk, the Company performs
ongoing credit evaluations and has credit insurance.
Note 5: Inventories, consisting primarily of purchased product held for
resale, are stated at the lower of cost (average) or net
realizable value.
Note 6: Supplemental Cash Flow Information: Cash paid for interest in
the six-month periods ended June 30, 1999 and 1998 was $1,456,000
and $2,204,000, respectively. Cash paid for income taxes during
the six-month periods ended June 30, 1999 and 1998 was $6,744,000
and $2,754,000, respectively.
Note 7: In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and
diluted EPS is provided as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------------- ---------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Numerator--basic and diluted EPS
Income before extraordinary item $ 3,172 $ 1,681 $ 5,583 $ 2,774
Less: preferred stock dividends (350) (431) (730) (868)
-------------- -------------- -------------- --------------
Income available to common stockholders, before
extraordinary item 2,822 1,250 4,853 1,906
Extraordinary item, net of tax effect -- (2,338) -- (2,338)
-------------- -------------- -------------- --------------
Net income (loss)--basic 2,822 (1,088) 4,853 (432)
Plus: impact of assumed conversion 350 431 730 868
-------------- -------------- -------------- --------------
Net income (loss)--diluted $ 3,172 $ (657) $ 5,583 $ 436
============== ============== ============== ==============
Denominator--basic EPS
Weighted average shares outstanding 12,479 7,986 11,926 6,884
-------------- -------------- -------------- --------------
Basic EPS
Income before extraordinary item $ 0.23 $ 0.16 $ 0.41 $ 0.28
Extraordinary item, net of tax effect -- (0.30) -- (0.34)
-------------- -------------- -------------- --------------
Basic earnings per share $ 0.23 $ (0.14) $ 0.41 $ (0.06)
============== ============== ============== ==============
Denominator--diluted EPS
Denominator--basic EPS 12,479 7,986 11,926 6,884
Effect of dilutive securities:
Convertible Preferred Stock 2,374 2,077 2,374 2,160
Common Stock options and warrants 506 684 545 694
-------------- -------------- -------------- --------------
15,359 10,747 14,845 9,738
============== ============== ============== ==============
Diluted EPS
Income before extraordinary item $ 0.21 $ 0.16 $ 0.38 $ 0.28
Extraordinary item, net of tax effect -- (0.22) -- (0.24)
-------------- -------------- -------------- --------------
Diluted earnings per share $ 0.21 $ (0.06) $ 0.38 $ 0.04
============== ============== ============== ==============
</TABLE>
Options to purchase 957,452 and 443,500 shares of Common Stock
were outstanding at June 30, 1999 and 1998, respectively, but
were not included in the calculation of net income per share
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<PAGE>
because the options' exercise price was greater than the average
market price of the Common Stock.
Note 8: On January 4, 1999, the Company acquired certain assets of
Infinite Solutions, Inc. ("Infinite") for $2,750,000 in cash and
88,560 shares of the Company's Common Stock (valued at $8.47 per
share). The acquisition has been accounted for as a purchase
with the result that Infinite's operations are included in the
Company's financial statements from the date of purchase. In
connection with the acquisition, the Company recorded
approximately $3,600,000 of goodwill and other intangible
assets.
Infinite is an Atlanta, Georgia based specialty distributor and
integrator of computer systems and software. For the year ended
December 31, 1998, Infinite had unaudited revenues of
approximately $19,000,000.
Note 9: At a special shareholders' meeting held on April 6, 1999, the
Company's stockholders approved the amendment of certain
provisions of its Series A Preferred Stock. Included in the
adopted changes was the elimination of the special dividend
provision, which potentially occurred on an annual basis
dependent on the average stock price of the Company's Common
Stock falling below a predetermined amount. Also included in the
adopted changes was the lowering of the conversion price of the
Preferred Stock from $9.31 to $8.00 per share.
Note 10: On April 27, 1999, the Company completed the acquisition of
Enlaces, an IBM distributor headquartered in Monterrey, Mexico,
for approximately $5,200,000 in cash and 235,638 shares of the
Company's Common Stock (valued at $8.49 per share). The
acquisition has been accounted for as a purchase with the result
that Enlaces' operations are included in the Company's financial
statements from the date of purchase. The agreement between the
Company and Enlaces contains an earnout provision which allows
Enlaces to earn up to an additional $8,000,000, $5,000,000 of
which is guaranteed. The guaranteed earnout has been recorded
as a liability by the Company.
Enlaces consists of a group of companies that sell IBM AS/400
and RS/6000 midrange products and services, and includes Enlaces
Computacionales and Enlaces y Asociados. It also includes
Instituto de Educacion Avanzada, which is an IBM authorized
training center and provides sales, technical support and
administrative services. For the year ended December 31, 1998,
Enlaces had translated unaudited revenues of approximately
$17,000,000.
Note 11: On April 23, 1999, the Company executed an amendment to its
credit facility with IBMCC, pursuant to which the Company
obtained an additional $5,000,000 to consummate the Enlaces
transaction (see Note 10 above). The loan bears interest at
prime (7.75% at June 30, 1999) plus 2.0% and is due in monthly
installments through September 2000.
Note 12: During the second quarter of 1999 the Company executed an
Executive Retention Agreement (the "Agreement") with its Chief
Executive Officer, P. Scott Munro ("Mr. Munro"). Included in the
agreement is a provision for a recourse loan ("loan") to Mr.
Munro for approximately $2,500,000 with a stated interest rate
of 4.9%. Mr. Munro executed the loan provision on May 10, 1999
and used the proceeds to exercise approximately 480,000 options
under the revised terms of the Company's Employee Stock Option
Plan. The loan is due and payable, including principal and
interest, in May 2002. If Mr. Munro remains employed with the
Company, the loan, and accrued interest, will be forgiven as
follows: $800,000 on January 1, 2000 (the effective date of this
$800,000 expense to the Company for the loan forgiveness will be
December 31, 1999) and the balance on May 9, 2002. The loan
provision of the Agreement also allows for Mr. Munro to borrow
up to an additional approximately $1,100,000 under the same
terms and conditions noted above. As of June 30, 1999, Mr. Munro
had not drawn on any portion of this additional loan amount.
-8-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
---------------------
RECENT EVENTS
On January 4, 1999, we acquired certain assets of Infinite for
$2,750,000 in cash and 88,560 shares of our Common Stock (valued at $8.47 per
share). The acquisition has been accounted for as a purchase with the result
that Infinite's operations are included in our financial statements from the
date of purchase. In connection with the acquisition, we recorded approximately
$3,600,000 of goodwill and other intangible assets.
Infinite is an Atlanta, Georgia based specialty distributor and
integrator of computer systems and software. For the year ended December 31,
1998, Infinite had unaudited revenues of approximately $19,000,000.
At a special shareholders' meeting held on April 6, 1999, our
stockholders approved the amendment of certain provisions of our Series A
Preferred Stock. Included in the adopted changes was the elimination of the
special dividend provision, which potentially occurred on an annual basis
dependent on the average stock price of our Common Stock falling below a
predetermined amount. Also included in the adopted changes was the lowering of
the conversion price of the Preferred Stock from $9.31 to $8.00 per share.
On April 27, 1999, we completed the acquisition of Enlaces, an IBM
distributor headquartered in Monterrey, Mexico, for approximately $5,200,000 in
cash and 235,638 shares of our Common Stock (valued at $8.49 per share). The
acquisition has been accounted for as a purchase with the result that Enlaces'
operations are included in our financial statements from the date of purchase.
The agreement between Enlaces and us contains an earnout provision which allows
Enlaces to earn up to an additional $8,000,000, $5,000,000 of which is
guaranteed.
Enlaces consists of a group of companies that sell IBM AS/400 and
RS/6000 midrange products and services, and includes Enlaces Computacionales and
Enlaces y Asociados. It also includes Instituto de Educacion Avanzada, which is
an IBM authorized training center and provides sales, technical support and
administrative services. For the year ended December 31, 1998, Enlaces had
translated unaudited revenues of approximately $17,000,000.
On April 23, 1999, we executed an amendment to our credit facility with
IBMCC, pursuant to which we obtained an additional $5,000,000 to consummate the
Enlaces transaction. The loan bears interest at prime (7.75% at June 30, 1999)
plus 2.0% and is due in monthly installments through September 2000.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net sales consist of sales of commercial mid-range servers, integrated
personal computers, workstations, peripheral equipment, storage products,
software and remarketed installation and technical support services, net of
sales discounts and returns. Net sales for the three months ended June 30, 1999
of $201,687,000 were 64% higher than the net sales of $122,920,000 for the
corresponding period in 1998. Sales increased due to the continued expansion of
our computer systems distribution group, particularly through the acquisitions
of MCBA Systems, Inc. ("MCBA") and UniDirect Corporation ("UDC") in the second
quarter of 1998, the distribution segment of REAL Applications, Ltd. ("REAL") in
the third quarter of 1998, Infinite in the first quarter of 1999 and Enlaces in
the second quarter of 1999. MCBA, UDC, REAL, Infinite and Enlaces accounted for
approximately $47,600,000 of net sales in the quarter ended June 30, 1999. Sales
also increased due to the opening of a sales office in Canada in the second
quarter of 1998, the recruitment of new customers, hiring of additional sales
representatives, increased integration orders and higher storage product sales
in our Computer and Peripherals Group ("CPG") as well as general market demand
for computer systems.
During the quarter ended June 30, 1999, sales to Sirius Computer
Solutions, Ltd. ("Sirius") accounted for approximately 14% of our net sales. Our
sales to Sirius are made under the Industry Remarketer Affiliate Agreement
between us and Sirius dated September 30, 1997 (the "Sirius Agreement"),
pursuant to which we appointed Sirius as one of our industry remarketer
affiliates of IBM products. The Sirius Agreement provides that Sirius may not
enter into any similar arrangement with any third party for the purpose of
selling IBM products to
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its end-user customers and also provides a favorable pricing structure to
Sirius. As a result, Sirius is expected to remain our largest customer for the
duration of the Sirius Agreement and to account for approximately the same
percentage of our net sales for the remainder of 1999 as it represented in the
second quarter of 1999. The Sirius Agreement expires on December 31, 2000, but
may be terminated earlier under certain conditions, not including termination at
will. Any disruption, change or termination of our relationship with Sirius or a
reduction in purchases from us by Sirius could have a material adverse effect
upon our business, financial condition and results of operations.
Cost of sales includes purchase costs, net of early payment and volume
discounts and product freight and does not include any depreciation or
amortization expense. Gross profit increased 50% to $22,405,000 in the quarter
ended June 30, 1999 from $14,889,000 in the quarter ended June 30, 1998. As a
percentage of net sales, gross profit decreased to 11.1% for the three months
ended June 30, 1999 from 12.1% for the corresponding period in 1998. This
decrease is a result of a shift in the relative mix of products being sold, a
higher proportion of large orders on which we extend volume discounts to
customers and the historically lower gross profit percentages of MCBA and REAL.
Selling, general and administrative expenses include: salaries and
commissions paid to sales representatives; compensation paid to marketing,
product management, technical and administrative personnel; depreciation of
infrastructure costs, including our information system and leasehold
improvements; amortization of intangibles resulting from goodwill recorded from
acquisitions; facility lease expenses; telephone and data line expenses; and
provision for bad debt losses. Selling, general and administrative expenses
increased 45% to $15,446,000 in the three months ended June 30, 1999 from
$10,627,000 in the same period a year ago due to the acquisitions of MCBA, UDC,
REAL, Infinite and Enlaces, necessary increases in personnel costs, higher
depreciation costs incurred as a result of additions to our infrastructure,
costs associated with opening an office in Canada and a higher amortization
expense as a result of increased goodwill related to acquisitions. As a
percentage of net sales, selling, general and administrative expenses were 7.7%
for the three months ended June 30, 1999, compared to 8.6% for the same period
in 1998. The decrease is primarily a result of increased operating leverage due
to the higher sales volumes and continued emphasis on expense control.
Interest expense decreased 20% in the three months ended June 30, 1999
versus the same period in 1998. The decrease was a result of the interest
expense from the debt associated with the purchase of Star Management Services,
Inc. ("SMS") being eliminated in the second quarter of 1998 with the proceeds of
a secondary offering. This decrease was partially offset by an increase in
interest expense resulting from additional working capital financing to fund
acquisitions and internal growth.
Our effective tax rate is 49% versus the statutory rate of 34% due
primarily to non-deductible goodwill, other intangibles and state income taxes.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net sales for the six months ended June 30, 1999 of $370,256,000 were
66% higher than the net sales of $223,424,000 for the corresponding period in
1998. Sales increased due to the continued expansion of our computer systems
distribution group, particularly through the acquisitions of MCBA and UDC in the
second quarter of 1998, REAL in the third quarter of 1998, Infinite in the first
quarter of 1999 and Enlaces in the second quarter of 1999. MCBA, UDC, REAL,
Infinite and Enlaces accounted for approximately $80,400,000 of net sales in the
six months ended June 30, 1999. Sales also increased due to the opening of a
sales office in Canada in the second quarter of 1998, the recruitment of new
customers, hiring of additional sales representatives, increased integration
orders and higher storage product sales in CPG as well as general market demand
for computer systems.
During the six months ended June 30, 1999, sales to Sirius accounted for
approximately 14% of our net sales.
Gross profit increased 48% to $41,498,000 in the six months ended June
30, 1999 from $27,950,000 in the six months ended June 30, 1998. As a percentage
of net sales, gross profit decreased to 11.2% for the six months
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<PAGE>
ended June 30, 1999 from 12.5% for the corresponding period in 1998. This
decrease is a result of a shift in the relative mix of products being sold, a
higher proportion of large orders on which we extend volume discounts to
customers and the historically lower gross profit percentages of MCBA and REAL.
Selling, general and administrative expenses increased 46% to
$29,073,000 in the six months ended June 30, 1999 from $19,853,000 in the same
period a year ago due to the acquisitions of MCBA, UDC, REAL, Infinite and
Enlaces, necessary increases in personnel costs, higher depreciation costs
incurred as a result of additions to our infrastructure, costs associated with
opening an office in Canada and a higher amortization expense as a result of
increased goodwill related to acquisitions. As a percentage of net sales,
selling, general and administrative expenses were 7.9% for the six months ended
June 30, 1999, compared to 8.9% for the same period in 1998. The decrease is
primarily a result of increased operating leverage due to the higher sales
volumes and continued emphasis on expense control.
Interest expense decreased 43% in the six months ended June 30, 1999
versus the same period in 1998. This was due to the payment of debt associated
with the purchase of SMS in the second quarter of 1998. In addition, interest
expense was higher in the six months ended June 30, 1998 due to the amortization
of discount for warrants issued in September 1997. The warrants were originally
determined to have a fair market value of $1,330,000, which was recorded as
discount on notes payable. During the first quarter of 1998, the warrants were
revalued at $2,721,000. We recorded approximately $330,000 in interest expense
for the discount on the warrants during the six months ended June 30, 1998. We
will not incur an additional expense resulting from the warrants as the
unamortized value was expensed as a result of our public offering and subsequent
payoff of the debt underlying the warrants in the second quarter of 1998.
Our effective tax rate is 49% versus the statutory rate of 34% due
primarily to non-deductible goodwill, other intangibles and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the six months ended
June 30, 1999 totaled $13,615,000 compared to $895,000 for the six months ended
June 30, 1998. Net cash provided by operating activities was primarily
attributable to income from operations of $5,583,000 and reductions in accounts
receivable and inventory, partially offset by a decrease in accounts payable and
an increase in other current assets. The reductions in accounts receivable and
inventory were a result of quarterly sales fluctuations as well as increased
emphasis on asset management.
Net cash used in investing activities during the six months ended June
30, 1999 was $10,644,000 compared to net cash used in investing activities of
$4,620,000 during the six months ended June 30, 1998. Investing activities in
the six months ended June 30, 1999 consisted of the acquisitions of Infinite and
Enlaces and continuing leasehold and computer hardware and software investments
made at our headquarters, sales office and warehouse and integration center
sites.
Net cash used in financing activities during the six months ended June
30, 1999 was $1,784,000 compared to net cash provided by financing activities of
$7,808,000 provided during the six months ended June 30, 1998. Financing
activities in the six months ended June 30, 1999 primarily consisted of
borrowings and repayments under the IBMCC Credit Facility. We had net repayments
during the first six months of 1999 as a result of the above noted increased
emphasis on asset management.
Under the IBMCC Credit Facility, our purchases from IBM and cash
advances from IBMCC are directly charged to the IBMCC Credit Facility and are
paid by us based on payment terms outlined in the agreement. Total borrowings
under the IBMCC Credit Facility are based on eligible accounts receivable and
inventory, as defined in the IBMCC Credit Facility, and are limited to
$125,000,000. The IBMCC Credit Facility expires on August 31, 2000 and
contains restrictive covenants which include the maintenance of minimum current
ratio,
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tangible net worth, net profit after tax, EBITDA to fixed charges and times
interest earned ratio, as defined in the IBMCC Credit Facility, and is
collateralized by substantially all our assets. We were not in compliance with
the current ratio and tangible net worth covenants at June 30, 1999. IBMCC
granted a waiver as of June 30, 1999 for these specific violations. There were
no outstanding cash advances under the IBMCC Credit Facility at June 30, 1999.
Cash advances bear interest at prime (7.75% at June 30, 1999) plus 1.875%. Based
on eligible assets, as of June 30, 1999, we had available borrowings of
approximately $22,500,000.
We have required substantial working capital to finance accounts
receivable, inventories and capital expenditures and have financed our working
capital requirements, capital expenditures and acquisitions primarily through
bank borrowings, cash generated from operations and sales of Common Stock and
Preferred Stock Units. We believe that our existing cash and available bank
borrowings are sufficient to fund our operations through the end of 1999. We are
actively considering other alternatives for raising additional cash including
public equity, private equity, or appropriate alternative debt financing. There
can be no assurance that we will be able to obtain additional financing on
acceptable terms or at sufficient levels.
YEAR 2000 COMPLIANCE ISSUES
GENERAL
We are in the process of completing a Year 2000 compliance audit. As
part of the audit process, we are developing and implementing company-wide Year
2000 repairs and upgrades to computer systems and hardware. The audit addresses
a broad range of issues affecting us as a result of the programming code in
existing computer, and computer related, systems as the year 2000 approaches.
The Year 2000 problem is complex, as many computer systems will be affected in
some way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail. The Year 2000 issue creates risks for us from problems in our
own computer and embedded systems and from third parties with whom we deal on
financial and other transactions. Failure of our and/or third parties' computer
systems could have a material adverse impact on our ability to conduct our
business. Our Year 2000 project is being headed up by our Vice President of
Information Technology, who reports directly to our Chief Financial Officer.
INTERNAL SYSTEMS
Our business software system includes an enterprise-wide solution which
was upgraded to the most recent version in fiscal 1998, which we believe to be
Year 2000 compliant. This system handles our most critical functions, including,
finance, inventory control, warehousing, shipping and receiving, logistics,
purchasing, sales and order taking. All of our domestic offices are fully
integrated into our enterprise-wide business software system. It is expected
that our newly acquired office in Monterrey, Mexico will be integrated over the
next three months. The hardware upgrade for the enterprise-wide solution was
completed in April 1999. Since our most critical functions are run on the
enterprise-wide business software system, any Year 2000 problems at the hardware
or software level could have a material adverse effect on us. If the system
failed to work on January 1, 2000, it could prevent us from controlling our
inventory, taking orders, buying inventory and billing our customers.
We are inventorying and analyzing our remaining centralized computer and
embedded systems, as well as our WAN Data services, WAN hardware, networking
equipment, voice-mail equipment and access and alarm systems, to identify any
potential Year 2000 issues and we will take appropriate corrective action based
on the results of such analysis. We currently expect to substantially complete
remediation and validation of our internal systems, as well as to develop
contingency plans, by the end of the third quarter of 1999.
THIRD PARTY SUPPLIERS AND VENDORS
We are currently in the process of contacting our critical suppliers,
manufactures, distributors and other vendors to determine if their operations
and the projects and services that they provide to us are Year 2000 compliant.
Our largest supplier of product is IBM, with approximately 75% of our revenue
derived from sales of IBM products. As a result, we will devote substantial
effort in working with IBM to address any potential
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Year 2000 problems. Absent written assurances of Year 2000 compliance by such
third parties, we will assume that such third parties will not be Year 2000
compliant and we will attempt to reduce our risks with respect to the failure of
such third parties to be Year 2000 compliant by developing contingency plans.
However, there can be no assurance that in all instances contingency plans can
be adopted or that they will adequately serve the needs of our customers and
other constituents.
PRODUCTS
Because we are a distributor of mid-range computers, software and
peripheral products, the Year 2000 issue is likely to have a substantial affect
on the products that we sell. 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
$1,800,000, $1,200,000 of which has already been spent to upgrade some non-Year
2000 compliant software and systems. It is possible that as we continue our
audit and detect problems that are not currently known to us, additional costs
may be incurred, which could be substantial.
The failure to correct a material Year 2000 problem could result in an
interruption in, or failure of, our normal business activities or operations.
Such failures could materially and adversely affect our results of operations,
liquidity and financial condition. Due to the inherent uncertainty in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third-party suppliers and customers, we are unable to determine at this time
whether the consequences of the Year 2000 failures will have a material impact
on our results of operations, liquidity or financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Risk Factors
WE ARE DEPENDENT UPON IBM AS OUR PRINCIPAL VENDOR
Our business, financial condition and results of operations are highly
dependent upon our relationship with International Business Machines Corporation
("IBM") and upon the continued market acceptance of IBM commercial mid-range
servers, storage products and other peripheral equipment. During the year ended
December 31, 1998 and the six months ended June 30, 1999, approximately 80% and
75%, respectively, of our net sales were generated from the sale of IBM
products, and we expect the percentage to be consistent in 1999. Our agreement
with IBM is non-exclusive and may be unilaterally modified by IBM upon 30 days'
written notice, renews automatically but may be terminated by IBM upon written
notice given not less than 90 days prior to the renewal date (January 1, 2001),
provides no franchise rights and may not be assigned by us. The continued
consolidation of wholesale distributors of commercial mid-range servers may also
result in IBM raising the sales volume threshold required to maintain most
favorable volume discount status. As part of our business strategy, and in order
to maintain most favorable volume discount status with IBM, we have recently
completed several acquisitions and we are actively engaged in an ongoing search
for additional acquisitions. We are also seeking
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to make minority equity investments in potential large customers for similar
purposes. However, we cannot assure you that we will be successful in completing
any future acquisitions or in making any equity investments. If we are unable to
complete other acquisitions or make equity investments, or are otherwise unable
to increase our sales volume through internal growth, we could lose our most
favorable volume discount status with IBM, which would, in turn, have a material
adverse effect on our relationship with IBM and on our business, financial
condition and results of operations. The occurrence of any of the following
events could have a material adverse effect upon our business, financial
condition and results of operations:
o any disruption, change or termination in our relationship with
IBM or in the manner in which IBM distributes its products;
o the failure of IBM to develop new products which are accepted by
our customers;
o our failure to continue to achieve sufficient sales volumes of
certain IBM products or to maintain the required infrastructure,
in each case as required to maintain most favorable volume
discount status; and
o the addition of other wholesale distributors by IBM.
We receive market development funds from IBM. These market development
funds directly affect our gross profit as we typically use them to offset a
portion of our sales and marketing expenses. Any change in the availability of
these market development funds would have a material adverse effect on our
business, financial condition and results of operations.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER
Our quarterly net sales and operating results may vary significantly as
a result of a variety of factors, including, but not limited to:
o changes in the supply and demand for commercial mid-range
servers, peripheral equipment, software and related services;
o the cost, timing and integration of acquisitions;
o the addition or loss of a key vendor or customer;
o the introduction of new technologies;
o changes in manufacturers' prices, price protection policies or
stock rotation (return) privileges;
o changes in market development or other promotional funds;
o product supply shortages;
o disruption of warehousing or shipping channels;
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.
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Our operating results could also be adversely affected by:
o general economic and other conditions affecting the timing of
customer orders and capital spending;
o a downturn in the market for commercial mid-range servers; and
o order cancellations or rescheduling.
In addition, historically a substantial portion of our net sales has been made
in the last few days of a quarter. Our quarterly operating results are therefore
difficult to predict and delays in the closing of sales near the end of a
quarter could cause quarterly net sales to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability.
Thus, we believe that period-to-period comparisons of our operating results are
not necessarily meaningful and should not be relied upon as an indication of our
future performance. Our future operating results are expected to fluctuate as a
result of these and other factors, which could have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock. It is possible that in future periods our operating results
may be below the expectations of securities analysts and investors. If this
happens, it is likely that the market price of our common stock would be
materially and adversely affected.
WE FACE SUBSTANTIAL COMPETITION
The markets in which we operate are highly competitive. Competition is
based primarily on:
o product availability;
o price;
o credit availability;
o speed of delivery;
o ability to tailor specific solutions to customer needs; and
o breadth and depth of product lines and services, technical
expertise and pre-sale and post-sale service and support.
Increased competition may result in further price reductions, reduced gross
profit margins and loss of market share, any of which could materially and
adversely affect our business, financial condition and results of operations.
Through our Mid-Range Systems Division, we compete with national,
regional and local distributors, including Gates/Arrow Commercial Systems, a
division of Arrow Electronics, Inc., Hamilton Hall-Mark Computer Products, a
subsidiary of Avnet, Inc., and Pioneer Standard Electronics, Inc. In some
limited circumstances, we also compete with our own vendors.
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
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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 14% OF OUR NET SALES
During the year ended December 31, 1998 and the six months ended June
30, 1999, sales to Sirius Computer Solutions, Ltd. accounted for approximately
18% and 14%, respectively, of our net sales. Our sales to Sirius are made under
the Industry Remarketer Affiliate Agreement between Savoir and Sirius dated as
of September 30, 1997, under which we appointed Sirius as one of our industry
remarketer affiliates for IBM products. This agreement provides that Sirius may
not enter into any similar arrangement with any third party for the purpose of
selling IBM products to its end-user customers and also provides a favorable
pricing structure to Sirius. As a result, Sirius is expected to remain our
largest customer for the duration of this agreement and to account for
approximately the same percentage of our net sales for the remainder of 1999 as
it represented in the first six months of 1999. The agreement with Sirius
expires on December 31, 2000, but may be terminated earlier upon the happening
of specified events. This agreement may not be unilaterally terminated by either
Savoir or Sirius. Any disruption, change or termination of our relationship with
Sirius or a reduction in Sirius's purchases from us could have a material
adverse effect upon our business, financial condition and results of operations.
INTEGRATION OF ACQUIRED COMPANIES AND OUR BUSINESS MAY NOT BE SUCCESSFUL
Since December 1994, we have completed thirteen acquisitions. The
combination of our business and acquired businesses requires, among other
things:
o integration of the respective management teams and sales and
other personnel;
o coordination of sales and marketing efforts;
o conversion of computer systems (including inventory control,
order entry and financial reporting); and
o integration of the businesses' products and physical facilities.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separate organizations. The integration of
operations will require the dedication of management resources which may
temporarily divert attention away from the day-to-day business of the combined
company. We cannot assure you 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.
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WE MAY NOT BE ABLE TO COMPLETE THE FUTURE ACQUISITIONS AND EXPANSION
THAT WE BELIEVE ARE IMPORTANT TO THE GROWTH OF OUR BUSINESS
Acquisitions have played an important role in the implementation of our
business strategy, and we believe that additional acquisitions are important to
our growth, development and continued ability to compete effectively in the
marketplace. We evaluate potential acquisitions and strategic investments on an
ongoing basis. We cannot assure you as to our ability to compete successfully
for available acquisition or investment candidates or to complete future
acquisitions and investments or as to the financial effect on us of any acquired
businesses or equity investments. Any future acquisitions and investments we
might make may involve significant cash expenditures and may result in increased
indebtedness, interest and amortization expense or decreased operating income,
any of which could have a material adverse effect on our business, financial
condition and results of operations. In addition, future growth will require
additional financing to fund the working capital requirements of our business
and to finance future acquisitions and strategic equity investments, if any. We
cannot assure you that we will be able to raise financing on satisfactory terms
and conditions, if at all. Should we be unable to implement successfully our
acquisition and investment strategy, our business, financial condition and
results of operations could be materially and adversely affected.
WE MAY HAVE DIFFICULTY IN MANAGING OUR GROWTH
Since 1997, we have experienced significant growth in the number of our
employees and in the scope of our operating and financial systems, resulting in
increased responsibilities for our management. To manage future growth
effectively, we will need to continue to improve our operational, financial and
management information systems, procedures and controls and expand, train,
motivate, retain and manage our employee base. We cannot assure you that we will
be successful in managing any future expansion or identifying, attracting and
retaining key personnel, and failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL
Our future success depends in part on the continued service of our key
management, technical, sales and marketing personnel and our ability to identify
and hire additional personnel. Competition for qualified management, technical,
sales and marketing personnel is intense and we cannot assure you that we can
retain and recruit adequate personnel to operate our business. Our success is
largely dependent on the skills, experience and efforts of our key personnel,
particularly P. Scott Munro, Chairman of the Board, President, Chief Executive
Officer and Secretary, and Carlton Joseph Mertens, II, Chief Executive Officer
and President of our subsidiary, Business Partner Solutions, Inc., each of whom
has entered into an employment agreement with us. The loss of either of these
individuals or other key personnel could have a material adverse effect on our
business, financial condition and results of operations. We maintain life
insurance on Mr. Munro and Mr. Mertens in the amounts of $7.9 million and $10.0
million, respectively.
WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS, AND THE AVAILABILITY OF
ADDITIONAL FINANCING IS UNCERTAIN
Our operations to date have required substantial amounts of working
capital to finance accounts receivable and product inventories. Although we
believe that we have sufficient funds, or alternate sources of funds, to carry
on our business as presently conducted through 1999, we will need to raise
additional amounts through public or private debt or equity financings in order
to achieve the growth contemplated by our business plan. We cannot 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:
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o delays in collection or deterioration in the quality of our
accounts receivable;
o economic trends in the technology industry;
o the obsolescence of our inventory;
o interest rate fluctuations; and
o the lending policies of our creditors.
Any decrease or material limitation on the amount of capital available to us
under our line of credit or other financing arrangements will limit our ability
to fill existing sales orders or expand our sales levels and, therefore, would
have a material adverse effect on our business, financial condition and results
of operations. In addition, any significant increase in interest rates will
increase our cost of financing and could have a material adverse effect on our
business, financial condition and results of operations. We are dependent on the
availability of accounts receivable financing on reasonable terms and at levels
that are high relative to our equity base in order to maintain and increase our
sales. We cannot assure you that such financing will continue to be available to
us or available under terms acceptable to us. Our inability to have continuous
access to such financing at reasonable costs would materially and adversely
impact our business, financial condition, results of operations and cash flows.
We have primarily funded our working capital requirements through a
$125.0 million Inventory and Working Capital Agreement with IBM Credit
Corporation. Borrowings under this credit facility are collateralized by
substantially all of our assets, including accounts receivable, inventories and
equipment. This credit facility provides that the outstanding interest-bearing
cash advance balance is subject to interest at the annual rate of prime plus
1.875% (9.625% at June 30, 1999) and expires on August 31, 2000. IBM Credit
Corporation may terminate this credit facility at any time upon the occurrence
of, and subsequent failure to cure, an "Event of Default" (as that term is
defined in the documentation for the credit facility). In the event of
termination, the outstanding borrowings under the credit facility become
immediately due and payable. The termination of this credit facility and our
subsequent inability to secure a replacement credit facility on terms and
conditions no less favorable than those contained in our present credit facility
would have a material adverse effect on our business, financial condition and
results of operations. See also Note 3 to Notes to Consolidated Financial
Statements.
OUR PRESENT CREDIT FACILITY LIMITS OUR ABILITY TO INCUR ADDITIONAL
INDEBTEDNESS
The terms of our credit facility with IBM Credit Corporation require
that we obtain the consent of IBM Credit Corporation prior to incurring some
types of additional indebtedness, including any additional senior or
subordinated debt. We may incur additional indebtedness without IBM's consent
through capital leases and general business commitments if the terms are
commercially reasonable and consistent with our prior business practices. Our
present credit facility and our anticipated cash flows may not provide funding
sufficient to achieve the growth contemplated by our business plan. We may
therefore need to obtain the consent of IBM Credit Corporation to 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
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distribution agreements, vendors will generally credit us for inventory losses
resulting from the vendor's price reductions if we comply with the conditions
set forth in those agreements. In addition, generally under such agreements, we
have the right to return for credit or exchange for other products a portion of
our slow moving or obsolete inventory items within designated periods of time.
We cannot assure you that, in every instance, we will be able to comply with all
necessary conditions or manage successfully our price protection or stock
rotation opportunities, if available. Also, a manufacturer that elects to
terminate a distribution agreement generally will repurchase its products
carried in a wholesale distributor's inventory. These industry practices are
sometimes not included in written agreements and do not protect us in all cases
from declines in inventory value, excess inventory or product obsolescence. We
cannot assure you that manufacturers will continue these protective practices or
that we will be able to manage successfully our existing and future inventories.
Historically, we have not experienced losses due to obsolete inventory in excess
of established inventory reserves. Significant declines in inventory value in
excess of established inventory reserves or dramatic changes in prevailing
technology could have a material adverse effect on our business, financial
condition and results of operations.
IBM and some of the other major systems vendors have developed programs
that allow us to assemble systems from components provided by the vendors. While
we have developed the ability to integrate and configure computer products, the
process of assembling large volumes of systems from components will require us
to implement new business practices. It is uncertain how the vendors will apply
policies related to price protection, stock rotation and other protections
against the decline in inventory value of system components acquired for a
system assembly program. We cannot assure you that we will be successful in the
integration and configuration of computer products or that our vendors will
apply price protection and stock rotation policies to our component inventories
devoted to these programs.
OUR BUSINESS HAS LOW PROFIT MARGINS
As a result of price competition, we have low gross profit and operating
income margins. These low margins magnify the impact on operating results of
variations in net sales and operating costs. We have partially offset the
effects of our low gross profit margins by increasing net sales, availing
ourself of large volume purchase discount opportunities and reducing selling,
general and administrative expenses as a percentage of net sales. However, we
cannot assure you that we will maintain or increase net sales, continue to avail
ourselves of large volume purchase discount opportunities or further reduce
selling, general and administrative expenses as a percentage of net sales.
Future gross profit margins may be materially and adversely affected by changes
in product mix, vendor pricing actions and competitive and economic pressures.
WE MAY EXPERIENCE PRODUCT SUPPLY SHORTAGES
We are dependent upon the supply of products available from our vendors.
From time to time, the industry has experienced shortages of some of the
products that we distribute due to vendors' difficulty in projecting demand.
When product shortages occur, we typically receive an allocation of product from
the vendor. We cannot assure you that our vendors will be able to maintain an
adequate supply of products to fulfill all of our orders on a timely basis. If
we fail to obtain adequate product supplies, or if product supplies are
available to competitors but not to us, it would have a material adverse effect
on our business, financial condition and results of operations.
WE EXTEND CREDIT TO CUSTOMERS WITHOUT REQUIRING COLLATERAL
We sell products to a broad geographic and demographic base of customers
and offer unsecured credit terms to our customers. Sirius accounted for
approximately 16% of our outstanding accounts receivable at June 30, 1999. No
other single customer accounted for more than 10% of our outstanding accounts
receivable at June 30, 1999. To reduce our credit risk, we perform ongoing
credit evaluations of our customers, maintain an allowance for doubtful accounts
and have credit insurance. Historically, we have not experienced losses from
write-offs in excess of established reserves. Should our customers increase the
rate at which they default on 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.
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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 drop-ship products from
our vendors directly to our customers via these carriers. Changes in shipping
terms or the inability of Federal Express, United Parcel Service or any other
third-party shipper to perform effectively (whether as a result of mechanical
failure, casualty loss, labor stoppage, other disruption or any other reason)
could have a material adverse effect on our business, financial condition and
results of operations. We cannot assure you that we can maintain favorable
shipping terms or replace our present shipping services on a timely or
cost-effective basis.
OUR PLANNED INTERNATIONAL EXPANSION MAY NOT BE SUCCESSFUL
One of the elements of our business strategy is to expand
internationally. We are distributing IBM products in Canada and have recently
begun distribution in Mexico. We cannot assure you that we will be able to
expand our international business successfully. Risks inherent in doing business
on an international level include:
o management of remote operations;
o unexpected changes in regulatory requirements;
o export restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
-20-
<PAGE>
o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
Any of these risks could adversely impact the success of our international
operations. We cannot assure you that difficulties encountered with one or more
of these factors will not have a material adverse effect on our future
international operations and, consequently, on our business, financial condition
and results of operations.
WE ARE SUBJECT TO YEAR 2000 UNCERTAINTIES
Many presently-installed computer systems and software products are
coded to accept only two-digit entries in the date code year field. This date
code field will need to distinguish 21st century dates from 20th century dates.
Systems that do not properly recognize date information could generate erroneous
data or cause a system to fail. We are in the process of conducting a Year 2000
compliance audit. The Year 2000 issue creates risks for us from problems in our
own computer and embedded systems and from third parties, such as vendors and
customers, with whom we deal on financial and other transactions. Failure of our
and/or third parties' computer systems could have a material adverse effect upon
our ability to conduct our business.
We believe that our enterprise-wide business software system, which
handles our most critical functions, including finance, inventory control,
warehousing, shipping and receiving, logistics, purchasing, sales and order
taking, is not subject to the Year 2000 problem. If the system as a whole fails
to work on January 1, 2000 it could prevent us from controlling our inventory,
taking orders, buying inventory and billing our customers. We are presently also
inventorying and analyzing our remaining centralized computer and embedded
systems, as well as our network data services, network hardware, networking
equipment, voice-mail equipment and access and alarm systems, to identify any
potential Year 2000 issues. We currently expect to complete substantially the
remediation and validation of our internal systems, as well as to develop
contingency plans, by the end of the third quarter of 1999.
As part of our Year 2000 audit, we are contacting our critical
suppliers, manufacturers, distributors and other vendors to determine if their
operations and the products and services that they provide to us are Year 2000
compliant. However, we cannot assure you that we will identify all Year 2000
problems in the products or computer systems of our vendors in advance of their
occurrence or that our vendors will be able to successfully rectify any problems
that are discovered. Absent written assurances of Year 2000 compliance by these
third parties, we will assume non-compliance and will attempt to mitigate our
risks with respect to these third parties by developing contingency plans.
However, we cannot assure you that we can implement contingency plans in all
instances or that our contingency plans will adequately serve the needs of our
customers and other constituents.
The estimated total cash expenditures required for the Year 2000 project
are approximately $1.8 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
-21-
<PAGE>
not intend to pay any cash dividends in the foreseeable future. The payment of
any future dividends will be at the discretion of our Board of Directors and
will depend upon, among other factors:
o future earnings and cash flow;
o operations;
o capital requirements;
o acquisitions and strategic investment opportunities;
o our general financial condition; and
o general business conditions.
Further, our ability to pay cash dividends is currently restricted by the terms
of our credit facility with IBM Credit Corporation and the terms of the
agreement by which we acquired Business Partner Solutions. The terms of future
credit facilities or other agreements may also contain similar restrictions. In
addition, our Certificate of Designation with respect to the Series A Preferred
Stock prohibits the payment of dividends on our common stock unless and until
dividends are paid on the Series A Preferred Stock in accordance with its terms.
IF WE ISSUE STOCK IN CONNECTION WITH FUTURE ACQUISITIONS, IT MAY RESULT
IN DILUTION TO EXISTING STOCKHOLDERS
In connection with acquisitions that we have completed, we expect to
issue up to approximately 100,000 additional shares of our common stock based on
the attainment of performance goals by the acquired businesses. In addition, we
may issue additional shares of our common stock or other equity or convertible
debt securities to effect future acquisitions or for other corporate purposes.
Upon the issuance of additional capital stock, the percentage ownership of our
stockholders will be reduced and stockholders may experience additional
dilution.
OUR STOCK PRICE HAS BEEN VOLATILE HISTORICALLY
The market price of our common stock has been and is likely to continue
to be highly volatile and may be significantly affected by factors such as:
o actual or anticipated fluctuations in our quarterly operating
results;
o announcements of technological innovations;
o industry conditions and trends;
o changes in or our failure to meet the expectations of securities
analysts and investors; and
o general market conditions and other factors.
It is possible that in some future quarter, our operating results may be below
the expectations of securities analysts and investors. If this occurs, the price
of our common stock would likely decline, perhaps substantially. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies. These broad market fluctuations may adversely affect the
market price of our common stock. In the past, following periods of volatility
in the market price of a particular company's securities, securities class
action litigation has often been brought. We cannot assure you that similar
litigation will not occur in the future with respect to us and our securities.
Any litigation relating to our securities could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect upon our business, financial condition and results of operations.
-22-
<PAGE>
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW MAY MAKE SAVOIR A
LESS ATTRACTIVE ACQUISITION CANDIDATE
Provisions of our Certificate of Incorporation and of our Bylaws may
make it more difficult for a third party to acquire, or may discourage a third
party from attempting to acquire, control of Savoir. These provisions could
limit the price that investors may be willing to pay for shares of our common
stock. We presently have 1,986,500 shares of Series A Preferred Stock
outstanding and 10 shares of Series B Preferred Stock outstanding and, without
any further vote or action by the stockholders, have the authority to issue up
to an additional 8,013,490 shares of preferred stock and to determine the price,
rights, preferences, qualifications, limitations and restrictions, including
voting rights, of this additional preferred stock. The issuance of additional
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could delay or prevent a
third party from acquiring a majority of our outstanding voting stock. Further,
Section 203 of the General Corporation Law of Delaware prohibits us from
engaging in various types of business combinations with interested stockholders.
These provisions may delay or prevent a change in control of Savoir without
action by the stockholders, and therefore could adversely affect the market
price of our common stock.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
---------------------------------------------------------
Not applicable.
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
-----------------
Other than as set forth below, the Company is not a party to any
material pending legal proceeding, nor is its property the subject of any
material pending legal proceeding, except ordinary routine legal proceedings
arising in the ordinary course of the Company's business and incidental to its
business, none of which are expected to have a material adverse impact upon the
Company's business, financial position or results of operations.
On June 18, 1999 a complaint was filed in the Superior Court of Orange
County, California by Lee Adams against Western Micro Technology, Inc., WMT
Acquisition Corp. and the Company. Mr. Adams' complaint purports to allege
causes of action for breach of contract, specific performance, accounting,
common count and false promise, arising out of an Agreement and Plan of
Reorganization, dated March 17, 1997, by and among Western Micro Technology,
Inc., WMT Acquisition Corp., Target Solutions, Inc. and Lee Adams. In addition
to equitable relief, the complaint seeks to recover general damages and $10
million in punitive damages. The Company believes the complaint is without merit
and intends to defend itself vigorously against this complaint.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
On April 27, 1999, the Company completed the purchase of Enlaces, an
IBM distributor headquartered in Monterrey, Mexico, for approximately $5,200,000
in cash and 235,638 shares of the Company's Common Stock valued at $8.49 per
share. The transaction was made in reliance upon the exemption from registration
set forth in Section 4(2) of the Securities Act of 1933, as amended, as a
transaction not involving a public offering.
See also Item 4(a)(1) below.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
(a) At a Special Meeting of Stockholders on April 6, 1999, the following
proposals were voted on and approved by the holders of 5,536,331 shares of
Common Stock and 1,819,172 shares of Series A Preferred Stock representing, on
an as converted basis, 53% of the outstanding shares entitled to vote on the
record date:
(1) To approve the amendment of certain provisions of the Company's
Series A Preferred Stock, including the elimination of the
special dividend provision, which potentially occurred on an
annual basis dependent on the average stock price of our Common
Stock falling below a predetermined amount, and including the
lowering of the conversion price of the Preferred Stock from
$9.31 to $8.00 per share:
VOTES FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
7,106,318 287,795 10,234 --
(b) At the Annual Meeting of Stockholders on June 29, 1999, the
following proposals were voted on and approved by the holders of 10,032,941
shares of Common Stock and 797,886 shares of Series A Preferred Stock
representing, on an as converted basis, 75% of the outstanding shares entitled
to vote on the record date:
(1) To elect a Board of seven (7) directors to hold office until the
next annual meeting of stockholders or until their respective
successors have been elected and qualified:
DIRECTOR VOTES FOR WITHHELD
-------- --------- --------
P. Scott Munro........................ 10,979,152 7,510
Carlton Joseph Mertens II............. 10,979,152 7,510
Angelo Guadagno....................... 8,016,322 2,970,340
James J. Heffernan.................... 10,979,152 7,510
Guy M. Lammle......................... 10,978,952 7,710
K. William Sickler.................... 10,979,152 7,510
J. Larry Smart........................ 10,951,152 35,510
-24-
<PAGE>
(2) To approve the amendment of the Company's 1994 Stock Option Plan
increasing the number of shares available for issuance under the
1994 Plan by 500,000 shares, and increasing the limitation on
the number of shares that can be granted to any officer of the
Company in any year from 300,000 shares to 1,000,000 shares:
VOTES FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
7,127,480 1,650,034 20,030 2,189,118
(3) To approve the amendment of the Company's 1995 Employee Stock
Purchase Plan increasing the number of shares reserved for
purchase under the 1995 Plan by 500,000 shares, and changing the
offering period under the 1995 Plan from six months to three
months:
VOTES FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
8,650,267 129,249 18,028 2,189,118
(4) To ratify the designation of PriceWaterhouseCoopers L.L.P. as
independent accountants for the period ending December 31, 1999:
VOTES FOR AGAINST ABSTAIN BROKER NON-VOTES
--------- ------- ------- ----------------
10,979,822 4,662 2,178 --
Item 5. OTHER INFORMATION.
-----------------
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
A. EXHIBITS
--------
The exhibits listed in the accompanying index to exhibits are filed
or incorporated by (as stated therein) as part of this report on Form 10-Q.
B. REPORTS ON FORM 8-K.
-------------------
No reports on Form 8-K, or amendments to previously filed reports
on Form 8-K, were filed during the quarter ended June 30, 1999.
-25-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
SAVOIR TECHNOLOGY GROUP, INC.
Dated: August 9, 1999 By /s/ P. Scott Munro
------------------------------------
P. Scott Munro
Chief Executive Officer
Dated: August 9, 1999 By /s/ James W. Dorst
------------------------------------
James W. Dorst
Chief Financial Officer
Dated: August 9, 1999 By /s/ Dennis J. Polk
------------------------------------
Dennis J. Polk
Chief Accounting Officer
-26-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
-------
3(i) Restated Certificate of Incorporation of Savoir Technology
Group, Inc., a Delaware corporation, filed as Exhibit 3(ii)
to the Company's Current Report on Form 8-K dated July 23,
1998, filed on August 14, 1997 and incorporated herein by
this reference. 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.
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 Amendment of the Certificate of Designation,
Preferences and Rights of the Company's Series A Preferred
Stock, filed as Exhibit 3.1(b) to the Company's Registration
Statement on Form S-3 dated April 29, 1999, and incorporated
herein by this reference.
4.2 Certificate of Designation, Preferences and Rights of the
Company's Series B Preferred Stock, filed as Exhibit 3.1 to
the Company's Current Report on Form 8-K dated October 10,
1997, and incorporated herein by this reference.
4.3 Registration and Put Rights Agreement among the Company
and the Purchasers dated September 30, 1997, filed as
Exhibit 4.2 to the Company's Current Report on Form 8-K
dated October 10, 1997, and incorporated herein by this
reference.
4.4 Warrant Agreement of Western Micro Technology, Inc. between
the Company and the Purchasers dated September 30, 1997
filed as Exhibit 4.3 to the Company's Current Report on
Form 8-K dated October 10, 1997, and incorporated herein by
this reference.
4.5 Common Stock Purchase Warrant in favor of Robert Fleming
Inc., filed as Exhibit 4.4 to the Company's Current Report
on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
4.6 Common Stock Purchase Warrant in favor of CanPartners
Investments IV, LLC filed as Exhibit 4.5 to the Company's
Current Report on Form 8-K dated October 10, 1997, and
incorporated herein by this reference.
4.7 13.5% Second Priority Senior Secured Notes Due September 30,
2000 in favor of Robert Fleming Inc., filed as Exhibit 4.6
to the Company's Current Report on Form 8-K dated
October 10, 1997, and incorporated herein by this reference.
4.8 13.5% Second Priority Senior Secured Notes Due September 30,
2000 in favor of Robert Fleming Inc., filed as Exhibit 4.7
to the Company's Current Report on Form 8-K dated
October 10, 1997, and incorporated herein by this reference.
4.9 Promissory Note of Registrant in the amount of Ten Million
Dollars ($10,000,000) in favor of ICC dated September 30,
1997, filed as Exhibit 4.8 to the Company's Current Report
on Form 8-K dated October 10, 1997, and incorporated herein
by this reference.
<PAGE>
EXHIBIT
-------
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.
*10.1 Amendment of Stock Option Agreements by and between the
Company and P. Scott Munro.
*10.2 Executive Retention Agreement, dated as of May 10, 1999, by
and between the Company and P. Scott Munro.
*10.3 Promissory Note, dated May 10, 1999, of P. Scott Munro in
favor of the Company.
10.4 Amendment to Inventory and Working Capital Financing
Agreement, dated as of May 21, 1999, by and among the
Company, Business Partner Solutions, Inc., MCBA Systems,
Inc. and IBM Credit Corporation.
27.1 Financial Data Schedule.
* Indicates management contract or compensation plan or arrangement.
SAVOIR TECHNOLOGY GROUP, INC.
AMENDMENT OF STOCK OPTION AGREEMENTS
This Amendment of Stock Option Agreements is made by and between Savoir
Technology Group, Inc., a Delaware corporation (the "Company"), and P. Scott
Munro (the "Optionee").
RECITALS
WHEREAS, the Company granted to the Optionee the stock options set forth on
EXHIBITS A AND B, attached hereto, to purchase shares of the Company's common
stock pursuant to the Company's Incentive and Non-Incentive Stock Option Plan
and the Company's 1994 Stock Option Plan, and each such stock option was
evidenced by a form of Stock Option Agreement and Option Exercise
Schedule/Notice of Grant between the Company and the Optionee (individually, an
"Option Agreement"); and
WHEREAS, the Company and the Optionee wish to amend the Option Agreements listed
on EXHIBITS A AND B, attached hereto, to provide for monthly vesting of shares
subject to each Option Agreement listed on EXHIBIT A, to provide that each such
Option Agreement listed on EXHIBIT A shall be immediately exercisable, pursuant
to the terms and conditions set forth below, and to provide that the shares
subject to each Option Agreement listed on EXHIBIT B be fully 100% vested.
AGREEMENT
NOW, THEREFORE, the Company and the Optionee agree as follows:
1. EFFECTIVE DATE. That this Amendment is effective as of May 10, 1999.
2. MONTHLY VESTING. That the shares subject to each Option Agreement
listed on EXHIBIT A attached hereto, shall vest on a monthly basis ratably over
the vesting period set forth in each such Option Agreement.
3. IMMEDIATELY EXERCISABLE STOCK OPTION AGREEMENTS. That each Option
Agreement listed on EXHIBIT A, attached hereto, shall be immediately exercisable
in full, regardless of the time that the shares subject to such Option Agreement
become vested, subject however to the Company's Unvested Share Repurchase Option
as set forth in Sections 3.1 through 3.4, below.
3.1 GRANT OF UNVESTED SHARE REPURCHASE OPTION. In the event the
Optionee's Company Service with the Participating Company Group is terminated
for any reason or no reason, with or without cause, or if the Optionee, the
Optionee's legal representative, or other holder of shares acquired upon
exercise of the Option attempts to sell, exchange, transfer, pledge, or
otherwise dispose of (except as otherwise may be permitted under the Option
Agreement) any
1
<PAGE>
shares acquired upon exercise of the option which exceed the Vested Shares as
defined in Section 3.2 below (the "Unvested Shares"), the Company shall have the
right to repurchase the Unvested Shares under the terms and subject to the
conditions set forth in Sections 3.1 through 3.4 of this Agreement (the
"Unvested Share Repurchase Option").
3.2 VESTED SHARES AND UNVESTED SHARES DEFINED. The "Vested
Shares" shall mean, as to any Option Agreement on any given date, the number of
shares of stock subject to the Option Agreement which are vested as of such date
under the vesting schedule applicable to such Option Agreement as amended by
this Agreement. On such given date, the "Unvested Shares" shall mean the number
of shares of stock acquired upon exercise of the Option which exceed the Vested
Shares determined as of such date.
3.3 EXERCISE OF UNVESTED SHARE REPURCHASE OPTION. The Company may
exercise the Unvested Share Repurchase Option by written notice to the Optionee
within sixty (60) days after (a) termination of the Optionee's Company Service
(or exercise of the Option, if later) or (b) the Company has received notice of
the attempted disposition of Unvested Shares. If the Company fails to give
notice within such sixty (60) day period, the Unvested Share Repurchase Option
shall terminate unless the Company and the Optionee have extended the time for
the exercise of the Unvested Share Repurchase Option. The Unvested Share
Repurchase Option must be exercised, if at all, for all of the Unvested Shares,
except as the Company and the Optionee otherwise agree.
3.4 PAYMENT FOR SHARES AND RETURN OF SHARES TO COMPANY. The
purchase price per share being repurchased by the Company shall be an amount
equal to the Optionee's original cost per share (the "Repurchase Price"). The
Company shall pay the aggregate Repurchase Price to the Optionee in cash within
thirty (30) days after the date of the written notice to the Optionee of the
Company's exercise of the Unvested Share Repurchase Option. For purposes of the
foregoing, cancellation of any indebtedness of the Optionee to any Participating
Company shall be treated as payment to the Optionee in cash to the extent of the
unpaid principal and any accrued interest canceled. The shares being repurchased
shall be delivered to the Company by the Optionee at the same time as the
delivery of the Repurchase Price to the Optionee.
4. ACCELERATION OF VESTING. The options listed on EXHIBIT B shall be
fully 100% vested as of the effective date hereof and shall be immediately
exercisable in full.
5. CONTINUATION OF OTHER TERMS. Except as set forth herein, all other
terms and conditions of each Option Agreement shall remain in full force and
effect.
6. TAX CONSEQUENCES OF AMENDMENT. The Optionee acknowledges that the
Optionee has been advised to consult with his own tax advisor regarding the
consequences of this Amendment and any subsequent exercise of the Option
Agreements.
2
<PAGE>
7. APPLICABLE LAW. This Agreement shall be governed by the laws of the
State of California as such laws are applied to agreements between California
residents entered into and to be performed entirely within the State of
California.
SAVOIR TECHNOLOGY GROUP, INC.
By: /s/ Angelo Guadagno
-------------------------------
Title: Director
----------------------------
OPTIONEE:
/s/ P. Scott Munro
----------------------------------
P. Scott Munro
3
<PAGE>
EXHIBIT A
---------
Stock Option Grants
-------------------
P. Scott Munro
--------------
Monthly Vesting/Immediately Exercisable
---------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------
Grant Date Type Exercise Shares
Price
-------------------------------------------------------
<S> <C> <C> <C>
6/21/95 ISO $2.25 60,000
-------------------------------------------------------
1/18/96 ISO $5 40,000
-------------------------------------------------------
9/8/98 NSO $6 300,000
-------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT B
---------
Stock Option Grants
-------------------
P. Scott Munro
--------------
To Be Fully 100% Vested
-----------------------
<TABLE>
<CAPTION>
-------------------------------------------------------
Grant Date Type Exercise Shares
Price
-------------------------------------------------------
<S> <C> <C> <C>
9/27/96 NSO $9 85,000
-------------------------------------------------------
5/16/97 NSO $11.375 75,000
-------------------------------------------------------
5/16/97 NSO $11.375 75,000
-------------------------------------------------------
1/16/98 NSO $10.25 150,000
-------------------------------------------------------
</TABLE>
EXECUTIVE RETENTION AGREEMENT
This Executive Retention Agreement ("Agreement") is made and entered
into by and between Savoir Technology Group, Inc. (the "Company") and P. Scott
Munro ("Munro") as of May 10, 1999 (the "Effective Date").
R E C I T A L S
A. Munro is the president and chief executive officer of Savoir Technology
Group, Inc. who possesses valuable knowledge of the Company, its
business and operations and the markets in which the Company competes.
B. The Company draws upon the knowledge, experience and objective advice
of Munro in order to manage its business for the benefit of the
Company's stockholders.
C. Munro and the Company have entered into a letter agreement dated May 1,
1998 setting forth the terms and conditions of Munro's employment (the
"May 1998 Letter Agreement").
D. In January, 1999, the Compensation Committee of the Board of Directors
agreed to supplement Munro's compensation arrangements so as to
compensate Munro for his contributions to the Company, to encourage his
retention and to create incentives for strategic alliances or other
transactions that maximize stockholder value.
1. GENERAL.
(a) NO EMPLOYMENT AGREEMENT. Munro is employed by the Company as its
president and chief executive officer ("CEO"). This Agreement does not obligate
the Company to continue to employ Munro for any specific period of time, or in
any specific role or geographic location. Subject to the terms of this Agreement
and the May 1998 Letter Agreement, either Munro or Company may terminate Munro's
employment at any time for any reason.
(b) DEFINED TERMS. Capitalized terms used in this Agreement shall have
the meanings set forth in Section 2, unless the context clearly requires a
different meaning.
2. DEFINITIONS. For purposes of this Agreement,
(a) "CAUSE" for the termination of Munro's employment by the Company
shall mean:
(i) theft; a material act of dishonesty or fraud; intentional
falsification of any employment or Company records; or the commission of any
criminal act which impairs Munro's ability to perform his duties as the
Company's president and CEO;
(ii) improper disclosure or use of the Company's confidential,
business or proprietary information; or
-1-
<PAGE>
(iii) the conviction (including any plea of guilty or nolo
contendere) for a crime involving moral turpitude causing material harm to the
reputation and standing of the Company, as determined by the Company in good
faith.
(b) "CHANGE OF CONTROL" shall mean the occurrence of any of the
following events:
(i) the direct or indirect sale or exchange by the stockholders
of the Company of all or substantially all of the stock of the Company where the
stockholders of the Company before such sale or exchange do not retain, directly
or indirectly, at least a majority of the beneficial interest in the voting
stock of the Company after such sale or exchange;
(ii) a merger or consolidation in which the Company is a party
where the stockholders of the Company before such merger or consolidation do not
retain, directly or indirectly, at least a majority of the beneficial interest
in the voting stock of the Company after such merger or consolidation;
(iii) the sale, exchange, or transfer of all or substantially all
of the assets of the Company other than a sale, exchange, or transfer to one (1)
or more subsidiaries of the Company; or
(iv) a liquidation or dissolution of the Company.
(c) "COMPANY" shall mean Savoir Technology Group, Inc. and following
a Change of Control, any successor thereto that agrees to assume or otherwise
becomes bound to, by operation of law, this Agreement.
(d) "PERMANENT DISABILITY" shall mean Munro's disability as
determined under the Company's long term disability plan.
(e) "GOOD REASON" means the occurrence of any of the following
conditions following a Change of Control, without Munro's informed written
consent, which condition(s) remain(s) in effect ten (10) days after written
notice to the Company from Munro of such condition(s):
(i) a material decrease in Munro's base salary or target bonus
amount;
(ii) any change in Munro's title, authority, responsibilities,
duties or reporting, so that any of them are not substantially equivalent to
Munro's title, authority, responsibilities, duties or reporting immediately
prior to the Change of Control.
(iii) the relocation of Munro's work place for the Company to a
location more than 50 miles from the location of the work place prior to the
Change of Control;
(iv) consummation of a Change of Control transaction in which
outstanding stock options granted and restricted stock issued by the Company
prior to the transaction are not fully assumed by the Successor, or replaced by
fully equivalent substitute options or restricted stock; or
-2-
<PAGE>
(v) any material breach of this Agreement by Company.
(f) "TERMINATION AFTER A CHANGE OF CONTROL" means:
(i) any termination of the employment of Munro by the Company
without Cause within twelve (12) months after the occurrence of a Change of
Control;
(ii) any resignation by Munro for Good Reason with twelve (12)
months after the occurrence of a Change of Control;
(iii) "Termination After a Change of Control" shall not include
any termination of the employment of Munro (1) by the Company for Cause; (2) by
the Company as a result of the Permanent Disability of Munro; (3) as a result of
the death of Munro; or (4) as a result of the voluntary termination of
employment by Munro for reasons other than Good Reason.
3. STOCK OPTIONS. Upon a Termination After a Change of Control, Munro
shall be entitled to acceleration of vesting for stock options and restricted
stock as provided under the stock option agreements and the May 1998 Letter
Agreement.
4. LOANS.
(a) As of the Effective Date of this Agreement, the Company will
loan Munro the sum of Two Million Five Hundred Twelve Thousand Seven Hundred
Twenty-Nine Dollars ($2,512,729) (the "Loan") which shall bear interest at the
minimum federal rate and which shall be due and payable on May 9, 2002, except
as otherwise provided in this Agreement. The Loan shall be subject to the terms
and conditions of the promissory note attached hereto as EXHIBIT 1 (the
"Promissory Note"). After the Effective Date and before May 9, 2002, the Company
will make one or more loans to Munro in a total amount of up to One Million
Eighty-Seven Thousand Two Hundred Seventy-One Dollars ($1,087,271) (the
"Subsequent Loans"). The Subsequent Loans shall bear interest at the minimum
federal rate and shall be due and payable on May 9, 2002, except as otherwise
provided in this Agreement. The Subsequent Loans shall be subject to the terms
and conditions of one or more promissory notes substantially in the form of the
promissory note attached hereto as EXHIBIT 1 (the "Subsequent Promissory
Notes").
(b) Notwithstanding any other provisions in the Promissory Note or
Subsequent Promissory Notes to the contrary, and provided Munro remains
continuously employed through the date specified below for such forgiveness,
principal and interest on the Loan and the Subsequent Loans shall be forgiven as
follows:
(i) Eight hundred thousand dollars ($800,000) of the principal
balance of the Loan and the interest that has accrued on such amount through
such date shall be forgiven by the Company on January 1, 2000.
(ii) On May 9, 2002, Munro's obligation to pay the then
outstanding balance of the Loan and Subsequent Loans (including unpaid principal
and accrued interest thereon) shall be forgiven and the Promissory Note and
Subsequent Promissory Notes shall be canceled.
-3-
<PAGE>
(iii) Upon the occurrence of a Change of Control, Munro's
obligation to pay the then outstanding balance of the Loan and the Subsequent
Loans (including unpaid principal and accrued interest thereon) shall be
forgiven and the Promissory Note and Subsequent Promissory Notes shall be
canceled.
(iv) The Company's Board of Directors may, in its sole discretion,
forgive any portion of the Loan and the Subsequent Loans at any time during
Munro's employment based upon Munro's performance or such other considerations
as it may deem appropriate.
(c) Notwithstanding any other provision in the Promissory Note to
the contrary, in the event Munro's employment is terminated by the Company for
any reason other than for Cause, an amount equal to Munro's original purchase
price of any shares of restricted stock which are unvested as of the date of
such termination (the "Unvested Shares") may, at Munro's option, be repaid by
delivery to the Company of the Unvested Shares and the outstanding balance of
the Loan, including principal and accrued interest, shall be forgiven and the
Promissory Note shall be canceled.
5. TERMINATION AFTER A CHANGE IN CONTROL. In the event of Munro's
Termination After a Change in Control, Munro shall be entitled to the following
cash severance benefits:
(a) CASH SEVERANCE BENEFITS:
(i) Munro shall receive a severance payment in an amount equal to
two hundred percent (200%) of the sum of his annual base salary plus his
annualized target incentives as in effect immediately prior to such Termination
After a Change of Control, less applicable withholding, payable in a lump sum
within fifteen (15) days of the Termination of employment; and
(ii) if Munro elects continued medical insurance coverage in
accordance with the applicable provisions of federal law (commonly referred to
as "COBRA"), the Company shall pay COBRA premium contributions for Munro and the
members of his immediate family for eighteen (18) months following the date of
Munro's termination of employment. Notwithstanding the foregoing, in the event
Munro becomes covered under another employer's group health plan during the
period provided for herein, the Company shall cease payment of the COBRA
premiums for Munro and the members of his immediate family.
(b) BASIC SEVERANCE BENEFITS. The severance benefits provided under
this Section 5 shall be in addition to payment of all salary and vacation earned
or accrued through the date of Munro's termination of employment, payment of any
bonuses earned through the date of termination of employment, reimbursement of
any expenses incurred prior to termination of employment pursuant to the
Company's expense reimbursement policy, and any and all benefits as may be
payable as a result of termination of employment under the Company's 401(k)
plan, and any other compensation or benefit programs.
6. 280G. To the extent that any of the payments and benefits provided
for in this Agreement constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and,
but for this Section 6 would be subject to the excise tax imposed by Section
4999 of the Code or any similar or successor provision, the
-4-
<PAGE>
Company agrees that Munro shall either (i) receive the full parachute payment
subject to the excise tax, or, if a reduced parachute would result in an
increase to Munro's after-tax income, (ii) receive a parachute payment that is
reduced to the extent necessary to maximize Munro's after-tax income. Unless the
Company and Munro otherwise agree in writing, any calculation required under
this Section 6 shall be made in writing by independent public accountants agreed
to by the Company and Munro (the "Accountants"), whose calculation shall be
conclusive and binding upon Munro and the Company for all purposes. For purposes
of calculating the value of Munro's options under this Section 6, the
Accountants may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and Munro shall
furnish to the Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Section 6. The
Company shall bear all costs the Accountants may reasonably incur in connection
with any calculations contemplated by this Section 6.
7. TAX WITHHOLDING. All payments under this Agreement shall be subject
to withholding for all applicable state and federal income and employment taxes.
At the time the Promissory Note is canceled or any payment thereunder is
forgiven, in whole or in part, or at any time thereafter as requested by the
Company, Munro hereby authorizes withholding from payroll and any other amounts
payable to him, and otherwise agrees to make adequate provision for any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company, which may arise in connection with such forgiveness
or cancellation. Munro acknowledges that, notwithstanding any other provision of
this Agreement, no obligations under the Promissory Note shall be forgiven or
canceled unless the tax withholding obligations of the Company are satisfied.
8. SOLE REMEDY FOR TERMINATION AFTER CHANGE OF CONTROL. The payments
and benefits provided for in this Agreement shall constitute Munro's sole and
exclusive remedy for any alleged injury or other damages arising out the
cessation of the employment relationship between Munro and the Company in the
event of Munro's Termination After a Change of Control.
9. RELEASE OF CLAIMS. The Company may condition the benefits payable
upon a Termination After a Change of Control described in Sections 4 and 5 of
this Agreement upon the delivery by Munro of a signed release of claims in a
form reasonably satisfactory to the Company.
10. CONFIDENTIALITY AGREEMENT. Munro agrees to abide by the terms and
conditions of the Company's standard Confidentiality Agreement that Munro
previously executed.
11. DISPUTE RESOLUTION. In the event of any dispute or claim relating
to or arising out of this Agreement, Munro and the Company agree that all such
disputes shall be fully and finally resolved by binding arbitration conducted by
the American Arbitration Association in San Jose, California in accordance with
its National Employment Dispute Resolution rules, as those rules are currently
in effect (and not as they may be modified in the future). Munro acknowledges
that by accepting this arbitration provision he is waiving any right to a jury
trial in the event of such dispute. Provided, however, that this arbitration
provision shall not apply to any disputes or
-5-
<PAGE>
claims relating to or arising out of the misuse or misappropriation of trade
secrets or proprietary information.
12. COVENANT NOT TO COMPETE UNFAIRLY. During Munro's employment with
the Company and for a period of two (2) years after any Termination After a
Change of Control pursuant to which Munro is entitled to benefits under Sections
4 and 5 of this Agreement, Munro agrees not to, directly or indirectly,
individually or as an owner, partner, stockholder, joint venturer, investor,
corporate officer, employee, consultant, principal, agent, trustee or licensor,
or in any other similar capacity whatsoever of or for any person, firm,
partnership, company or corporation (other than the Company),
(a) own, manage, consult with, operate, sell, control or participate
in the ownership, management, operation, sales or control of any business that
competes with the business of the Company now existing or pursued by the Company
prior to Munro's termination; or
(b) request or advise any of the customers, suppliers or other
business contacts of the Company to withdraw, curtail, cancel or refrain from
increasing their business with the Company.
13. NONSOLICITATION. During Munro's employment with the Company and for
a period of two (2) years thereafter, after any Termination After a Change of
Control, Munro agrees not to, directly or indirectly, individually or as an
owner, partner, stockholder, joint venturer, corporate officer, employee,
consultant, principal, agent, trustee or licensor, or in any other similar
capacity whatsoever of or for any person, firm, partnership, company or
corporation (other than the Company),
(a) interfere with, impair, disrupt or damage the Company's
relationship with any of its clients or prospective clients by soliciting or
encouraging or causing others to solicit or encourage, any of them for the
purpose of diverting or taking away the business such clients have with the
Company; or
(b) interfere with, impair, disrupt or damage the Company's business
by soliciting, encouraging or causing others to solicit or encourage any of the
Company's employees to discontinue their employment relationship with the
Company.
14. INTERPRETATION. Munro and the Company agree that this Agreement
shall be interpreted in accordance with and governed by the laws of the State of
California.
15. SUCCESSORS AND ASSIGNS.
(a) The Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, expressly,
absolutely and unconditionally to assume and agree to perform this Agreement in
the same manner and to the same extent that the Company would be required to
perform it if no such succession or assignment had taken place. Failure of the
Company to obtain such agreement shall be a material breach of this Agreement.
-6-
<PAGE>
(b) If after a Change of Control the Company (or any Successor)
fails to reasonably confirm that it has performed the obligation described in
this Section 15 within ten (10) days after written notice from Munro, Munro
shall be entitled to terminate Munro's employment with the Company for Good
Reason, and to receive the benefits provided under this Agreement in the event
of Termination Upon Change of Control.
16. ENTIRE AGREEMENT.
(a) This Agreement constitutes the entire agreement between Munro
and the Company regarding the matters described herein, with the exception of
(i) the Promissory Note described in Section 4 and attached hereto as EXHIBIT 1;
(ii) the May 1998 Letter Agreement; (iii) the Confidentiality Agreement
described in Section 10; and (iii) any stock option agreements between Munro and
the Company, including all amendments thereto. This Agreement (including the
documents described in (i) through (iv) herein) supersedes all prior
negotiations, representations or agreements between Munro and the Company,
whether written or oral, concerning Munro's employment by the Company.
(b) In the event of a Termination After a Change of Control, this
Agreement shall supersede the provisions of paragraph 6(c) of the May 1998
Letter Agreement, except for the last sentence of paragraph 6(c) of the May 1998
Letter Agreement which shall remain in effect. Except as otherwise expressly
provided herein, the May 1998 Letter Agreement shall remain in effect in
accordance with its terms.
(c) This Agreement is not intended to and shall not affect, limit or
terminate any plans, programs, or arrangements of the Company that are regularly
made available to a significant number of employees or officers of the company,
including, without limitation, the Company's stock option plans.
17. VALIDITY. If any one or more of the provisions (or any part
thereof) of this Agreement shall be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions (or any part thereof) shall not in any way be affected or impaired
thereby.
-7-
<PAGE>
18. MODIFICATION. This Agreement may only be modified or amended by a
supplemental written agreement signed by Munro and the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
SAVOIR TECHNOLOGY GROUP, INC.
By: /s/ Angelo Guadagno
------------------------------
Its: Director
-----------------------------
/s/ P. Scott Munro
---------------------------------
P. Scott Munro
-8-
<PAGE>
EXHIBIT 1
FORM OF PROMISSORY NOTE
$ 2,512,729 Campbell, California
May 10, 1999
The undersigned, P. Scott Munro ("Borrower"), hereby unconditionally
promises to pay to the order of Savoir Technology Group, Inc., a Delaware
corporation (the "Lender"), the sum of Two Million Five Hundred Twelve Thousand
Seven Hundred Twenty-Nine Dollars ($2,512,729) plus interest.
The outstanding principal balance of this Note, together with all
accrued and unpaid interest hereon, shall be due and payable on May 9, 2002.
Interest shall accrue on unpaid principal from the date hereof until maturity at
a rate of 4.9%, compounded semiannually. If any payment of principal or interest
on this Note shall become due on a Saturday, Sunday, or public holiday under the
laws of the State of California, such payment may be made on the next succeeding
business day with the same force and effect as if made on such date.
This Note may be prepaid, in whole or in part, at any time or from time
to time, without penalty or premium. Any prepayment of principal must be
accompanied by then accrued but unpaid interest. Interest shall cease to accrue
on amounts of principal so prepaid. Any prepayment of interest shall include all
interest accrued to the date of payment, but need not include any payment of
principal.
All payments of principal or interest shall be made in lawful money of
the United States of America to the Lender at the offices of the Lender, or at
such other address as the Lender shall specify to Borrower in writing. Any
payment shall be deemed made upon receipt by Lender.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Borrower for cancellation.
Borrower waives its rights to impose any defense (other than payment),
set-off, counterclaim or cross-claim in any action brought on this Note.
Borrower waives presentment, demand for performance, notice of performance,
protest, notice of protest, and notice of dishonor.
<PAGE>
If the indebtedness represented by this Note or any part hereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Borrower agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' and collection fees and costs.
This Note is being delivered in and shall be construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and
year first above written.
----------------------------------
P. Scott Munro
2
PROMISSORY NOTE
$ 2,512,729 Campbell, California
May 10, 1999
The undersigned, P. Scott Munro ("Borrower"), hereby unconditionally
promises to pay to the order of Savoir Technology Group, Inc., a Delaware
corporation (the "Lender"), the sum of Two Million Five Hundred Twelve Thousand
Seven Hundred Twenty-Nine Dollars ($2,512,729) plus interest.
The outstanding principal balance of this Note, together with all
accrued and unpaid interest hereon, shall be due and payable on May 9, 2002.
Interest shall accrue on unpaid principal from the date hereof until maturity at
a rate of 4.9%, compounded semiannually. If any payment of principal or interest
on this Note shall become due on a Saturday, Sunday, or public holiday under the
laws of the State of California, such payment may be made on the next succeeding
business day with the same force and effect as if made on such date.
This Note may be prepaid, in whole or in part, at any time or from time
to time, without penalty or premium. Any prepayment of principal must be
accompanied by then accrued but unpaid interest. Interest shall cease to accrue
on amounts of principal so prepaid. Any prepayment of interest shall include all
interest accrued to the date of payment, but need not include any payment of
principal.
All payments of principal or interest shall be made in lawful money of
the United States of America to the Lender at the offices of the Lender, or at
such other address as the Lender shall specify to Borrower in writing. Any
payment shall be deemed made upon receipt by Lender.
Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Borrower for cancellation.
Borrower waives its rights to impose any defense (other than payment),
set-off, counterclaim or cross-claim in any action brought on this Note.
Borrower waives presentment, demand for performance, notice of performance,
protest, notice of protest, and notice of dishonor.
<PAGE>
If the indebtedness represented by this Note or any part hereof is
collected at law or in equity or in bankruptcy, receivership or other judicial
proceedings, or if this Note is placed in the hands of attorneys for collection
after default, Borrower agrees to pay, in addition to the principal and interest
payable hereon, reasonable attorneys' and collection fees and costs.
This Note is being delivered in and shall be construed in accordance
with the laws of the State of California.
IN WITNESS WHEREOF, Borrower has executed this Note as of the day and
year first above written.
/s/ P. Scott Munro
----------------------------------
P. Scott Munro
2
AMENDMENT
TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT
This AMENDMENT TO THE INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT
(this "Amendment") is made as of May 21st, 1999 by and among SAVOIR TECHNOLOGY
GROUP, INC. ("SVTG"), a Delaware corporation, BUSINESS PARTNER SOLUTIONS, INC.,
a Texas corporation, MCBA SYSTEMS, INC., an Alabama corporation ("MCBA") and IBM
CREDIT CORPORATION, a Delaware corporation ("IBM Credit"). (SVTG and BPS and
MCBA are each referred to herein as a "Customer or, collectively, the
"Customers").
RECITALS:
WHEREAS, Customers and IBM Credit have entered into that certain
inventory and Working Capital Financing Agreement dated as of September 4, 1998
(as amended, supplemented or otherwise modified from time to time, the
"Agreement");
WHEREAS, Customers have requested that (i) certain terms of the
Agreement be modified, and (ii) certain financial covenants therein be adjusted,
and IBM Credit is willing to agree to the requests, subject to the terms set
forth in this Amendment.
AGREEMENT
NOW THEREFORE, in consideration of the premises set forth herein, and
for other good and valuable consideration, the value and sufficiency of which is
hereby acknowledged, the parties hereto agree that the Agreement is amended as
follows:
SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall
have the respective meanings set forth in the Agreement.
SECTION 2. AMENDMENT. The Agreement is hereby amended as follows:
A. Section 8.6(D) of the Agreement is deleted in its entirety and the
following substituted in lieu thereof:
"stock or other instruments representing investments in other companies
which exceed $1,000,000.00 at the time of acquisition of such Investment;"
B. Attachment A to the Agreement is hereby amended by deleting such
Attachment A in its entirety and substituting, in lieu thereof, the Attachment A
attached hereto. Such new Attachment A shall be effective as of the date
specified in the new Attachment A. The changes contained in the new Attachment A
include, without limitation, the following:
(a) The Free Financing Period Exclusion Fee is reduced from "Product
Advance multiplied by 0.40%" to "Product Advance multiplied by 0.25%".
Page 1 of 3
<PAGE>
(b) Customers shall be required to maintain the following financial ratios,
percentages and amounts as of the last day of the fiscal period under
review by IBM Credit, based on the consolidated financial statements of
Savoir Technology Group, Inc. and in each case measured on a
year-to-date basis through the last day of the fiscal period under
review:
<TABLE>
<CAPTION>
Covenant
Covenant Requirement
-------- -----------
<S> <C>
(i) Current Assets to Current
Liabilities Greater than 1.0 : 1.0 (through 12/31/1998)
Greater than 1.05 : 1.0 (1/1/1999 - 12/31/1999)
Greater than 1.10 : 1.0 (1/1/2000 and thereafter)
(ii) Net Profit after Tax
to Revenue Equal to or Greater than 0.9 percent (through 12/31/1998)
Equal to or Greater than 1.0 percent (1/1/1999 - 3/31/1999)
Equal to or Greater than 1.2 percent (4/1/1999 - 6/30/1999)
Equal to or Greater than 1.4 percent (7/1/1999 - 12/31/1999)
Equal to or Greater than 1.5 percent (1/1/2000 and thereafter)
(iii) Tangible Net Worth Equal to or Greater than $0.0 (through 12/31/1998)
Equal to or Greater than $2.0 million (1/1/1999 - 3/31/1999)
Equal to or Greater than $3.4 million (4/1/1999 - 6/30/1999)
Equal to or Greater than $1.1 million (7/1/1999 - 9/30/1999)
Equal to or Greater than $4.2 million (10/1/1999 - 12/31/1999)
Equal to or Greater than $35.0 million (1/1/2000 and thereafter)
(iv) Net Profit before Tax and
Interest Expense to Equal to or Greater than
Interest Expense 2.25 : 1.0
(v) EBITDA to Fixed Charges Equal to or Greater than 1.0 : 1.0
</TABLE>
(c) Definitions of accounting terms necessary for the calculation of the
EBITDA to Fixed Charges ratio have been added.
C. The Stated Maturity Date for a Term Loan is changed to September 30,
2000 (from August 31, 1999) and the repayment terms are revised as described in
Attachment A.
SECTION 3. REPRESENTATIONS AND WARRANTIES. Customers make to IBM Credit the
following representations and warranties all of which are material and are made
to induce IBM Credit to enter into this Amendment.
SECTION 3.1. ACCURACY AND COMPLETENESS OF WARRANTIES AND REPRESENTATIONS. All
representations made by Customers in the Agreement were true and accurate and
complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Customers in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
Page 2 of 3
<PAGE>
SECTION 3.2 VIOLATION OF OTHER AGREEMENTS. The execution and delivery of this
Amendment and the performance and observance of the covenants to be performed
and observed hereunder do not violate or cause Customers not to be in compliance
with the terms of any agreement to which any Customer is a party.
SECTION 3.3 LITIGATION. Except as has been disclosed by Customers to IBM Credit
in writing, there is no litigation, proceeding, investigation or labor dispute
pending or threatened against any Customer, which if adversely determined, would
materially adversely affect such Customer's ability to perform Customer's
obligations under the Agreement and the other documents, instruments and
agreements executed in connection therewith or pursuant hereto.
SECTION 3.4 ENFORCEABILITY OF AMENDMENT. This Amendment has been duly
authorized, executed and delivered by Customers and is enforceable against
Customers in accordance with its terms.
SECTION 4. RATIFICATION OF AGREEMENT. Except as specifically amended hereby, all
of the provisions of the Agreement shall remain unamended and in full force and
effect. Customers hereby, ratify, confirm and agree that the Agreement, as
amended hereby, represents a valid and enforceable obligation of Customers, and
is not subject to any claims, offsets or defenses.
SECTION 5. GOVERNING LAW. This Amendment shall be governed by and interpreted in
accordance with the laws which govern the Agreement.
SECTION 6. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been executed by duly authorized
representatives of the undersigned as of the day and year first above written.
SAVOIR TECHNOLOGY GROUP, INC. BUSINESS PARTNER SOLUTIONS, INC.
By: /S/ James W. Dorst By: /S/ James W. Dorst
------------------------------------ ----------------------------------
Print Name: James W. Dorst Print Name: James W. Dorst
---------------------------- --------------------------
Title: CFO Title: Director
--------------------------------- -------------------------------
Date: May 20, 1999 Date: May 20, 1999
---------------------------------- --------------------------------
IBM CREDIT CORPORATION MCBA SYSTEMS, INC.
By: /S/ Tracey M. Wyatt By: /S/ James W. Dorst
----------------------------------- ----------------------------------
Print Name: Tracey M. Wyatt Print Name: James W. Dorst
---------------------------- --------------------------
Title: Regional Operations Manager Title: Secretary
--------------------------------- -------------------------------
Date: May 21, 1999 Date: May 20, 1999
---------------------------------- --------------------------------
Page 3 of 3
<PAGE>
ATTACHMENT A, EFFECTIVE DATE May 01, 1999 ("IWCF ATTACHMENT A")
TO INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
DATED September 4, 1998
Customers: SAVOIR TECHNOLOGY GROUP, INC.;
BUSINESS PARTNER SOLUTIONS, INC;
MCBA SYSTEMS, INC.
I. Fees, Rates and Repayment Terms:
(A) Credit Line: One Hundred Twenty Five Million Dollars
($125,000,000.00);
(B) Term Loan Commitment:
(i) Term A Loan: Fifteen Million Dollars ($15,000,000.00)
(ii) Term B Loan: Five Million Dollars ($5,000,000.00)
(C) Borrowing Base:
(i) 85% of the amount of the Customers' Eligible Accounts
other than Concentration Accounts as of the date of
determination as reflected in the Customers' most recent
Collateral Management Reports;
(ii) a percentage, determined from time to time by IBM Credit
in its sole discretion, of the amount of Customers'
Concentration Accounts for a specific Concentration Account
Debtor as of the date of determination as reflected in the
Customers' most recent Collateral Management Report; unless
otherwise notified by IBM Credit, in writing, the percentage
for Concentration Accounts for a specific Concentration
Account Debtor shall be the same as the percentage set forth
in paragraph (i) of the Borrowing Base;
(iii) 85% of the amount of the Customers' Eligible Accounts
arising from the sale of goods to or the performance of
services for Customers' clients in Puerto Rico ("Eligible
Puerto Rico Accounts") as of the date of determination as
reflected in the Customers' most recent Collateral Management
Reports, PROVIDED HOWEVER that Eligible Puerto Rico Accounts
shall be limited to the lesser of (a) an amount equal to 10%
of Eligible Accounts, or (b) $25,000.00;
(iv) 100% of amount of the Customer's Eligible IBM Credit
Accounts as of the date of determination as reflected in the
Customer's most recent Collateral Management Report;
(v) 100% of the Customers' inventory in the Customers'
possession as of the date of determination as reflected in the
Customers' most recent Collateral Management Report
constituting Products (other than service parts) financed
through a Product Advance by IBM Credit, provided, however,
IBM Credit has a
Page 1 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
I. Fees, Rates and Repayment Terms (continued):
first priority security interest in such Products and such
Products are in new and in un-opened boxes. The value to be
assigned to such inventory shall be based upon the Authorized
Supplier's invoice price to Customers for Products net of all
applicable price reduction credits;
(vi) 30% of the value of other inventory in which IBM Credit
has a first priority security interest and ordered from
parties other than Authorized Suppliers which are on such
parties' current price list, UP TO a maximum collateral value
of $6,000,000.00. The value to be assigned to such inventory
shall be based upon the supplier's invoice price to Customers
for such products net of all applicable price reduction
credits;
(vii) 20% of the value of Customers' IBM new parts inventory
purchased from IBM. The value to be assigned to such inventory
shall be based upon the supplier's invoice price to Customers
for such products net of all applicable price reduction
credits;
(viii) 75% of used equipment purchased from IBM Credit;
(ix) 75% of verifiable prepaid expenses to IBM Credit End User
Financing for used equipment.
(D) Product Financing Charge: Prime Rate plus 1.625%.
(E) Product Financing Period: 75 days.
(F) Collateral Insurance Amount: Forty Million Dollars
($40,000,000.00). Such insurance shall also include coverage
against earthquake peril for at least 30% of the value of
inventory stored in California.
(G) A/R Finance Charge:
(i) PRO Advance Charge: Prime Rate plus 1.875%.
(ii) WCO Advance Charge: Prime Rate plus 1.875%.
(H) Term Loan Finance Charges:
(i) Term A Loan: Prime Rate plus 2.000%.
(ii) Term B Loan: Prime Rate plus 2.000%.
(Note: Beginning October 1, 1999 through the Stated Maturity
Date, the outstanding Term Loan Advances will be amortized in
equal monthly payments of principal and interest. If the Prime
Rate changes during this period, the monthly payments to repay
the then remaining principal will be recalculated over the
remaining term at the new Term Loan Finance Charge).
Page 2 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
I. Fees, Rates and Repayment Terms (continued):
(I) Delinquency Fee Rate: Prime Rate plus 6.500%
(J) Shortfall Transaction Fee: Shortfall Amount multiplied
by 0.30%
(K) Free Financing Period Exclusion Fee: Product Advance
multiplied by 0.25%
(L) Other Charges:
(i) Monthly Service Fee: $1,500.00.
(ii) Commitment Fee: from and including March 1, 1999
to and including February 29,
2000, one half of one percent
(0.50%) per annum of the
difference between the then
current Credit Line and the
Average of the sum of the Product
Advances, PRO Advances and WCO
Advances calculated and billed at
the end of each month.
(iii) Closing Fee $200,000 payable on the Closing
Date.
Page 3 of 10
<PAGE>
II. Bank Account
(A) Customers' Lockbox(es) and Special Account(s) will be maintained at the
following Bank(s):
Name of Bank: Silicon Valley Bank
Address: 3003 Tasman Drive
Santa Clara, CA 95054
Phone: (408) 654-7400
Lockbox Address: Dept. CH10917
Palatine, IL 60055-0917
Special Account #: 341822772
Name of Bank: Silicon Valley Bank
Address: 3003 Tasman Drive
Santa Clara, CA 95054
Phone: (408) 654-7400
Lockbox Address: Dept. LA21955
Pasadena, CA 91185-1955
Special Account #: 341822772
Name of Bank: Silicon Valley Bank
Address: 3003 Tasman Drive
Santa Clara, CA 95054
Phone: (408) 654-7400
Account #: 341822770 (operating account)
Pgae 4 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
III. Financial Covenants:
Definitions: The following terms shall have the following respective meanings in
this Attachment A. All amounts shall be determined in accordance with generally
accepted accounting principles (GAAP).
Current shall mean within the on-going twelve month period.
Current Assets shall mean assets that are cash or expected to become
cash within the on-going twelve months.
Current Liabilities shall mean payment obligations resulting from past
or current transactions that require settlement within the on-going
twelve month period. All indebtedness to IBM Credit shall be considered
a Current Liability for purposes of determining compliance with the
Financial Covenants.
Long Term shall mean beyond the on-going twelve month period.
Long Term Assets shall mean assets that take longer than a year to be
converted to cash. They are divided into four categories: tangible
assets, investments, intangibles and other.
Long Term Debt shall mean payment obligations of indebtedness which
mature more than twelve months from the date of determination, or
mature within twelve months from such date but are renewable or
extendible at the option of the debtor to a date more than twelve
months from the date of determination.
Net Profit after Tax shall mean Revenue plus all other income, minus
all costs, including applicable taxes.
Net Profit before Tax shall mean Revenue plus all other income, minus
all costs, excluding applicable taxes.
Revenue shall mean the monetary expression of the aggregate of products
or services transferred by an enterprise to its customers for which
said customers have paid or are obligated to pay, plus other income as
allowed.
Subordinated Debt shall mean Customers' indebtedness to third parties
as evidenced by an executed Notes Payable Subordination Agreement in
favor of IBM Credit.
Page 5 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
III. Financial Covenants (continued):
Tangible Net Worth shall mean:
Total Net Worth minus;
(a) goodwill, organizational expenses, pre-paid expenses,
deferred charges, research and development expenses,
software development costs, leasehold expenses,
trademarks, trade names, copyrights, patents, patent
applications, privileges, franchises, licenses and
rights in any thereof, and other similar intangibles
(but not including contract rights) and other current
and non-current assets as identified in Customers'
financial statements (except for those assets
identified in Attachment B, Section VII or otherwise
mutually agreed to in writing by Customers and IBM
Credit); and
(b) all accounts receivable from employees, officers,
directors, stockholders and affiliates; and
(c) all callable/redeemable preferred stock (with the
exception of preferred stock redeemable for other
equity securities, and up to $21.6 million of that
preferred stock issued concurrent with the
acquisition of Star Management Services, Inc).
Total Assets shall mean the total of Current Assets and Long Term
Assets.
Total Liabilities shall mean the Current Liabilities and Long Term Debt
less Subordinated Debt, resulting from past or current transactions,
that require settlement in the future.
Total Net Worth (the amount of owner's or stockholder's ownership in an
enterprise) is equal to Total Assets minus Total Liabilities.
Working Capital shall mean Current Assets minus Current Liabilities.
EBITDA shall mean, for any period (determined on a consolidated basis in
accordance with GAAP), (a) the Consolidated Net Income of Customer for such
period, plus (b) each of the following to the extent reflected as an expense in
the determination of such Consolidated Net Income: (i) the Customer's provisions
for taxes based on income for such period; (ii) Interest Expense for such
period; and (iii) depreciation and amortization of tangible and intangible
assets of Customer for such period.
Page 6 of 10
<PAGE>
Fixed Charges shall mean, for any period, an amount equal to the sum, without
duplication, of the amounts for such as determined for the Customer on a
consolidated basis, of (i) scheduled repayments of principal of all Indebtedness
(as reduced by repayments thereon previously made), (ii) Interest Expense, (iii)
capital expenditures (iv) dividends, and (v) leasehold improvement expenditures.
Fixed Charge Coverage Ratio shall mean the ratio as of the last day of any
fiscal year of (i) EBITDA as of the last day of such fiscal year to (ii) Fixed
Charges.
Interest Expense shall mean, for any period, the aggregate consolidated interest
expense of Customer during such period in respect of Indebtedness determined on
a consolidated basis in accordance with GAAP, including, without limitation,
amortization of original issue discount on any Indebtedness and of all fees
payable in connection with the incurrence of such Indebtedness (to the extent
included in interest expense), the interest portion of any deferred payment
obligation and the interest component of any capital lease obligations.
Page 7 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
III. Financial Covenants (continued):
Customers will be required to maintain the following financial ratios,
percentages and amounts as of the last day of the fiscal period under review by
IBM Credit, based upon the consolidated financial statements of Savoir
Technology Group, Inc. and in each case measured on a year-to-date basis through
the last day of the fiscal period under review:
a) Current Assets to Current Liabilities ratio greater than 1.0 :
1.0 from on and after the Closing Date through and including
December 31, 1998; greater than 1.05 : 1.0 from on and after
January 1, 1999 through and including December 31, 1999;
greater than 1.10 : 1.0 thereafter;
b) Net Profit after Tax to Revenue percentage equal to or greater
than 0.9 percent from on and after the Closing Date through
and including December 31, 1998; equal to or greater than 1.0
percent from on and after January 1, 1999 through and
including March 31, 1999; 1.20 percent from on and after April
1, 1999 through and including June 30, 1999; 1.4 percent from
on and after July 1, 1999 through and including December 31,
1999; equal to or greater than 1.5 percent thereafter;
c) Tangible Net Worth equal to or greater than $0.00 from on and
after the Closing Date through and including December 31,
1998; equal to or greater than $2.0 million from on and after
January 1, 1999 through and including March 31, 1999; equal to
or greater than ($3.4) million from on and after April 1, 1999
through and including June 30, 1999; equal to or greater than
($1.1) million from on July 1, 1999 through and including
September 30, 1999; equal to or greater than $4.2M from on
October 1, 1999 through and including December 31, 1999; equal
or greater than $35.0 million from on January 1, 2000 and
thereafter;
d) Net Profit before Tax and interest expense to interest expense
ratio equal to or greater than 2.25 : 1.0;
e) EBITDA to Fixed Charges ratio equal to or greater than
1.0 : 1.0
IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of the
Agreement:
- Executed Contingent Blocked Account Amendments;
- Executed Waiver of Landlord Lien for all premises in which a
landlord has the right of levy for rent;
Page 8 of 10
<PAGE>
- Executed Termination Notices of those Intercreditor Agreements
dated 9/30/97 between Canpartners Investments IV, Robert Fleming,
Inc. and IBM Credit, and Harvey Najim, C. Joseph Mertens and IBM
Credit;
- Fiscal year-end financial statements of Customers as of end of
Customers' prior fiscal year audited by an independent certified
public accountant;
- A Certificate of Location of Collateral whereby each Customer
certifies where Customer presently keeps or sells inventory,
equipment and other tangible Collateral;
Page 9 of 10
<PAGE>
IWCF ATTACHMENT A TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT ("IWCF AGREEMENT")
IV. Additional Conditions Precedent Pursuant to Section 5.1 (K)
of the Agreement: (continued
- Subordination or Intercreditor Agreements from all creditors
having a lien which is superior to IBM Credit in any assets that
IBM Credit relies on to satisfy Customers' obligations to IBM
Credit;
- Listing of all creditors providing accounts receivable financing
to Customers;
- A Collateral Management Report in the form of Attachment F as of
the Closing Date;
- A Compliance Certificate as to Customers' compliance with the
financial covenants set forth in Attachment A as of the last
fiscal month of Customers for which financial statements have been
published;
- An Opinion of Counsel substantially in the form and substance of
Attachment H whereby the Customers' counsel states his or her
opinion about the execution, delivery and performance of the
Agreement and other documents by the Customers to be delivered to
IBM Credit within 90 days of Closing Date;
- A Corporate Secretary's Certificate from each Customer
substantially in the form and substance of Attachment I certifying
to, among other items, the resolutions of Customer's Board of
Directors authorizing borrowing by Customer;
- Termination or release of Uniform Commercial Code filing by other
creditors as required by IBM Credit;
- A copy of an all-risk insurance certificate pursuant to Section
7.8 (B) of the Agreement;
- Payment of the Closing Fee on the Closing Date;
Page 10 of 10
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,007
<SECURITIES> 0
<RECEIVABLES> 132,621
<ALLOWANCES> 997
<INVENTORY> 33,727
<CURRENT-ASSETS> 198,324
<PP&E> 15,156
<DEPRECIATION> 7,209
<TOTAL-ASSETS> 315,672
<CURRENT-LIABILITIES> 196,592
<BONDS> 0
0
20
<COMMON> 127
<OTHER-SE> 108,267
<TOTAL-LIABILITY-AND-EQUITY> 315,672
<SALES> 201,687
<TOTAL-REVENUES> 201,687
<CGS> 179,282
<TOTAL-COSTS> 179,282
<OTHER-EXPENSES> 15,446
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 774
<INCOME-PRETAX> 6,185
<INCOME-TAX> 3,013
<INCOME-CONTINUING> 3,172
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,172
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.21
</TABLE>
