UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ______________
Commission File No. 0-11560
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SAVOIR TECHNOLOGY GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2414428
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
44931 INDUSTRIAL BLVD., FREMONT, CA
-----------------------------------
(Address of principal executive offices)
94538
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(Zip Code)
(408) 379-0177
--------------
(Registrant's telephone number,
including area code)
N/A
---
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
YES |X| NO |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT APRIL 24, 2000
----- -----------------------------
Common Stock $0.01 par value 13,609,907
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Consolidated Statements of Operations for the Three Months
Ended March 31, 2000 and 1999 1
Consolidated Balance Sheets at March 31, 2000 and December
31, 1999 2
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
PART II - OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
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 11. 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.
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net sales................................... $ 193,854 $ 168,569
Cost of goods sold.......................... 175,065 149,476
------------- -------------
Gross profit........................... 18,789 19,093
------------- -------------
Selling, general and administrative expenses 14,701 13,627
------------- -------------
Operating income ...................... 4,088 5,466
Interest expense............................ 681 738
------------- -------------
Income before income taxes............. 3,407 4,728
Provision for income taxes.................. 1,438 2,317
------------- -------------
Net income.................................. 1,969 2,411
Dividends on convertible preferred stock
subject to redemption................ (354) (380)
------------- -------------
Net income attributable to common
stockholders......................... $ 1,615 $ 2,031
============= =============
Net income per share attributable to
common stockholders:
Basic.................................. $ 0.12 $ 0.18
============= =============
Diluted................................ $ 0.12 $ 0.17
============= =============
Number of shares used in per share calculations:
Basic.................................. 13,448 11,344
============= =============
Diluted................................ 13,834 14,141
============= =============
</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 BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
------------------ -------------------
<S> <C> <C>
Current Assets:
Cash............................................................ $ 5,851 $ 9,863
Trade accounts receivable, net of allowance for doubtful
accounts of $1,467 at March 31, 2000 and $2,036 at
December 31, 1999............................................. 144,392 145,328
Other receivables............................................... 14,202 14,331
Inventories..................................................... 32,617 36,986
Other current assets............................................ 7,100 6,588
------------------ -------------------
Total current assets........................................ 204,162 213,096
Property and equipment, net.......................................... 6,020 5,998
Excess of cost over acquired net assets and other
intangibles, net................................................ 100,483 100,969
Other assets......................................................... 4,649 4,630
------------------ -------------------
Total assets........................................... $ 315,314 $ 324,693
================== ===================
LIABILITIES, CONVERTIBLE PREFERRED STOCK SUBJECT TO REDEMPTION AND
STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable................................................... $ 34,324 $ 21,018
Current portion of long-term debt............................... 2,874 2,969
Accounts payable................................................ 148,602 177,161
Accrued expenses and other current liabilities.................. 6,105 6,379
------------------ -------------------
Total current liabilities................................... 191,905 207,527
Long-term debt, less current portion................................. 6,841 4,376
------------------ -------------------
Total liabilities...................................... 198,746 211,903
------------------ -------------------
Commitments and contingencies........................................
Convertible preferred stock subject to redemption, $0.01 par value;
10,000,000 shares authorized; issued and outstanding: Series A:
1,850,012 shares at March 31, 2000 and December 31, 1999;
Series B: 10 shares at March 31, 2000 and December 31, 1999;
liquidation preference: $17,691 at March 31, 2000 and December
31, 1999........................................................ 14,580 14,580
Stockholders' Equity:
Common stock, $0.01 par value; 25,000,000 shares authorized;
issued and outstanding: 13,562,655 shares at March 31, 2000
and 13,165,311 at December 31, 1999........................... 136 132
Shareholder note receivable..................................... (2,513) (2,513)
Additional paid-in capital...................................... 101,366 98,866
Retained earnings............................................... 2,999 1,725
------------------ -------------------
Total stockholders' equity.................................. 101,988 98,210
------------------ -------------------
Total liabilities, convertible preferred stock subject to
redemption, and stockholders' equity.................... $ 315,314 $ 324,693
================== ===================
</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 Three Months
Ended March 31,
------------------------------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................... $ 1,969 $ 2,411
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................... 2,343 2,021
Provision for doubtful accounts receivable.................. 334 175
Gain on sale of fixed assets................................ -- (4)
Deferred taxes.............................................. (84) (147)
Changes in assets and liabilities:
Accounts receivable......................................... 602 37,630
Inventories................................................. 4,369 (1,550)
Other current assets........................................ 398 (2,843)
Accounts payable............................................ (28,559) (39,438)
Accrued expenses and other current liabilities.............. (274) (7,573)
------------------ -------------------
Net cash used in operating activities.................. (18,902) (9,318)
------------------ -------------------
Cash flows from investing activities:
Proceeds from sale of fixed assets.............................. 7 10
Acquisition of businesses, net of cash acquired................. -- (2,750)
Acquisition of other assets..................................... (663) (199)
Acquisition of property and equipment........................... (602) (952)
------------------ -------------------
Net cash used in investing activities....................... (1,258) (3,891)
------------------ -------------------
Cash flows from financing activities:
Proceeds from short-term borrowings............................. 139,795 140,160
Payments on short-term borrowings............................... (121,596) (124,769)
Payments on debt obligations.................................... (2,523) (34)
Payment of cash dividend on convertible preferred stock subject
to redemption............................................... (27) (40)
Proceeds from exercise of stock options and warrants............ 204 25
Proceeds from employee stock purchase plan...................... 295 299
------------------ -------------------
Net cash provided by financing activities................... 16,148 15,641
------------------ -------------------
Net (decrease) increase in cash...................................... (4,012) 2,432
Cash--beginning of period............................................. 9,863 5,820
------------------ -------------------
Cash--end of period................................................... $ 5,851 $ 8,252
================== ===================
</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
March 31, 2000
(Unaudited)
Note 1: The unaudited consolidated financial statements which include the
accounts of Savoir Technology Group, Inc. and its subsidiaries (the
"Company," or "Savoir" or "We") have been prepared in accordance with
the instructions to Form 10-Q and do not include all information and
footnotes necessary to comply with generally accepted accounting
principles. In the opinion of management, all normal recurring
adjustments considered necessary for a fair presentation have been
included. The consolidated statements of operations for the three
months ended March 31, 2000 are not necessarily indicative of the
results to be expected for a full year or for any other period. The
December 31, 1999 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, 1999.
Note 2: In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS No.
133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives which meet the definition of a hedge transaction are
recorded each period in either earnings or other comprehensive income.
The Company believes that the impact of the pronouncement will be
minimal, as historically, the Company has not entered into any
derivative or hedging transactions.
Note 3: The Company has two operating segments: the Mid-Range Systems Division
("MRS") and the Computer and Peripherals Group ("CPG"). Products
distributed by MRS includes mid-range servers that run on UNIX, OS/400
and NT operating systems, peripheral equipment (including wireless
networking equipment, storage products, printers and terminals) and
software. Through CPG, the Company offers its customers value-added
systems integration services up to, and including, installation (e.g.,
"turnkey" systems assembly of departmental servers, workstations,
hardware and software "bundling" and light manufacturing). The
accounting policies of the segments are the same. Although management
measures the profitability of its business through the results of
these two segments, the Company's segments have similar economic
characteristics and, as such, the results of operations have been
aggregated and separate disclosure is not presented.
Foreign sales for the three months ended March 31, 2000 and 1999 were
approximately $16,968,000 and $1,384,000, respectively.
During the three months ended March 31, 2000 and 1999, approximately
85% and 80%, respectively, of our net sales were generated from the
sale of IBM products.
One customer accounted for approximately 18% and 15% of the Company's
net sales in the three months ended March 31, 2000 and 1999
respectively. No other single customer accounted for more than 10% of
the Company's net sales.
Note 4: The Company has an inventory and working capital financing agreement
(the "IBMCC Credit Facility") with IBM Credit Corporation (IBMCC), an
affiliate of International Business Machines Corporation ("IBM"),
whereby purchases from IBM and cash advances from IBMCC are directly
charged to the IBMCC Credit Facility and are paid by the Company based
on payment terms
-4-
<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
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.
For the period December 27,1999 through July 21, 2000 the line was
temporarily increased to $145,000,000. The IBMCC Credit Facility is
renewable in September 2000 and contains restrictive covenants which
include the maintenance of minimum current ratio, tangible net worth
and times interest earned ratio, as defined, and is collateralized by
substantially all assets of the Company. As of March 31, 2000 the
Company had outstanding borrowings under this agreement of
$114,696,000. Of the total outstanding borrowings, $24,236,000
represented cash advances at March 31, 2000, with the remainder
included in accounts payable which amounted to $90,460,000. Cash
advances bear interest at prime (9% at March 31, 2000) plus 1.875%.
Based on eligible assets, as of March 31, 2000, the Company had
borrowings available of approximately $16,826,000.
Note 5: Revenue Recognition and Accounts Receivable: The Company records
revenue, net of allowances for estimated returns, at the time of
product shipment. To reduce credit risk, the Company performs ongoing
credit evaluations and has credit insurance.
Note 6: Inventories, consisting primarily of purchased product held for
resale, are stated at the lower of cost (average) or net realizable
value.
Note 7: Supplemental Cash Flow Information: Cash paid for interest in the
three-month periods ended March 31, 2000 and 1999 was $548,438 and
$867,000, respectively. Cash paid for income taxes during the
three-month periods ended March 31, 2000 and 1999 was $807,018 and
$1,673,000, respectively.
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
Note 8: In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
----------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Numerator--basic and diluted EPS
Net income................................................ $ 1,969 $ 2,411
Less: convertible preferred stock dividends.............. (354) (380)
--------------- --------------
Net income attributable to common stockholders--basic..... 1,615 2,031
Plus: impact of assumed convertible preferred conversion.. -- 380
--------------- --------------
Net income attributable to common stockholders--diluted... $ 1,615 $ 2,411
=============== ==============
Denominator--basic EPS
Weighted average shares outstanding....................... 13,448 11,344
=============== ==============
Basic earnings per share attributable to common
stockholders............................................ $ 0.12 $ 0.18
=============== ==============
Denominator--diluted EPS
Denominator--basic EPS.................................... 13,448 11,344
Effect of dilutive securities:
Convertible preferred stock subject to redemption......... -- 2,038
Common stock options and warrants......................... 386 759
--------------- --------------
13,834 14,141
=============== ==============
Diluted earnings per share attributable to common
stockholders............................................ $ 0.12 $ 0.17
=============== ==============
</TABLE>
Options and warrants to purchase 3,064,330 and 1,752,233 shares of
common stock were outstanding at March 31, 2000 and 1999,
respectively, but were not included in the calculation of net income
per share because their exercise price was greater than the average
market price of the common stock. Additionally, the common stock
issuable (2,211,319 shares) upon the assumed conversion of the
convertible preferred stock subject to redemption was not included in
the diluted earnings per share calculations for the three months ended
March 31, 2000 as it would have been anti-dilutive.
Note 9: On March 2, 2000 we agreed to merge with a subsidiary of Avnet, Inc.
so that we would become a wholly owned subsidiary of Avnet. The
acquisition has been approved by the boards of directors of both
entities and is subject to approval by the stockholders of Savoir. If
the merger is completed, depending upon the average of the closing
trading price of Avnet's common stock during the 15 days ending on the
fifth day prior to the vote of our stockholders, our common
stockholders will receive between 0.15494 and 0.11452 of a share of
Avnet common stock for each share of Savoir stock they own. The
transaction is expected to close in July. If the merger is not
completed, we maybe required to pay Avnet a termination fee of
$750,000, and we may be required to pay Avnet an additional fee of
$3.75 million if we enter into an acquisition agreement with another
company within a year of termination of the Avnet merger agreement.
Avnet, Inc. is a Phoenix, Arizona based distributor of semiconductors,
interconnect, passive and
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
electromechanical components and computer products. At its last fiscal
year end, Avnet reported sales of approximately $6.35 billion.
Also, we issued an option to purchase up to 2,023,435 shares of our
common stock to Avnet, Inc. The option is exercisable at $6.83 per
share. The option was issued in connection with our entering into an
agreement to merge with a subsidiary of Avnet. The option will become
exercisable if Avnet becomes entitled to receive a termination fee
under the merger agreement.
Note 10: The Company is from time to time subject to routine legal proceedings
arising in the ordinary course of the Company's business and
incidental to its business, none of which the Company expects 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 us. 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, Mr.
Adams' complaint seeks to recover compensatory damages in the amount
of $10.0 million and punitive damages according to proof. Mr. Adams
has subsequently dismissed without prejudice his cause of action for
accounting. We believe the complaint is without merit and intend to
defend ourselves vigorously against this complaint. In addition, we
have filed a cross-complaint for breach of contract in which we are
seeking compensatory damages in the amount of $1.5 million. The case
has been set for trial on November 27, 2000.
Note 11: During 1999, the Company recorded pre-tax charges totaling $11.3
million related to the restructuring of corporate functions and the
recognition of impaired assets. Of this amount, $2.8 million
represents costs associated with the consolidation of facilities and
elimination of redundant back-office functions. The costs associated
with the restructuring principally include lease termination costs
($500,000), leasehold and other asset disposals ($1.4 million) and
personnel (a total of 38 employees, primarily in administration,
finance and information technology) severance costs ($900,000). The
remaining $8.5 million represents asset impairment charges related to
recorded goodwill and fixed assets. These impairment charges
principally include the write off of goodwill ($7.0 million) related
to unprofitable business activities acquired in previous purchases
(Target Solutions, Inc., International Data Products, LLC and
UniDirect, Inc.), the operations of which the Company has terminated
as part of its restructuring. The balance of the impairment charge
relates to the write off of unproductive electronic commerce assets
($1.5 million).
The Company expects that all activities and expenditures
related to this restructuring will be completed by June 30,
2000. Activity in the accrued restructuring liabilities is as
follows:
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<PAGE>
SAVOIR TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accrued at
December 31, Paid/ Accrued at
1999 Written Off March 31, 2000
-------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Goodwill and electronic commerce asset.... $ 65 $ 5 $ 60
Severance................................. 366 268 98
Lease termination......................... 333 159 174
-------------- ------------- --------------
Total restructuring costs................. $ 764 $ 432 $ 332
============== ============= ==============
</TABLE>
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RECENT EVENTS
On March 2, 2000 we agreed to merge with a subsidiary of Avnet, Inc. so
that we would become a wholly owned subsidiary of Avnet. The Acquisition has
been approved by the boards of directors of both entities and is subject to
approval by the stockholders of Savoir. If the merger is completed, depending
upon the average of the closing trading price of Avnet's common stock during the
15 days ending on the fifth day prior to the vote of our stockholders, our
common stockholders will receive between 0.15494 and 0.11452 of a share of Avnet
common stock for each share of Savoir stock they own. The transaction is
expected to close in July. If the merger is not completed, we may be required to
pay Avnet a termination fee of $750,000, and we may be required to pay Avnet an
additional fee of $3.75 million if we enter into an acquisition agreement with
another company within a year of termination of the Avnet merger agreement.
Avnet, Inc. is a Phoenix, Arizona based distributor of semiconductors,
interconnect, passive and electromechanical components and computer products. At
its last fiscal year end, Avnet reported sales of approximately $6.35 billion.
Also, we issued an option to purchase up to 2,023,435 shares of our
common stock to Avnet, Inc. The option is exercisable at $6.83 per share. The
option was issued in connection with our entering into an agreement to merge
with a subsidiary of Avnet. The option will become exercisable if Avnet becomes
entitled to receive a termination fee under the merger agreement.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net sales consists of sales of commercial mid-range servers, integrated
personal computers, workstations, peripheral equipment, storage products,
software and remarketed installation and technical support services, net of
sales discounts and returns. Net sales for the three months ended March 31, 2000
of $193,854,000 were 15% higher than the net sales of $168,569,000 for the
corresponding period in 1999. Sales increased due to the continued expansion of
our computer systems distribution group through the acquisition of Enlaces in
April 1999. Enlaces accounted for $6,600,000 of sales in the quarter ended March
31, 2000. Sales also increased due to the recruitment of new customers, higher
storage product sales and general market demand for computer systems.
During the quarter ended March 31, 2000, sales to Sirius Computer
Solutions, Ltd. ("Sirius") accounted for approximately 18% of our net sales. Our
sales to Sirius are made under the Industry Remarketer Affiliate Agreement
between the Company and Sirius dated as of September 30, 1997, as amended by
Amendments Nos. 1 and 2 thereto, dated December 31, 1998 and November 30, 1999
respectively (the "Sirius Agreement"), pursuant to which the company appointed
Sirius as one of its industry remarketer affiliates of IBM products. The Sirius
Agreement provides that Sirius may not enter into any similar arrangement with
any third party for the purpose of selling IBM products to its end user
customers and also provides a favorable pricing structure to Sirius. As a
result, Sirius is expected to remain 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 2000 as it represented in the first quarter of
2000. 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 decreased 2% to $18,789,000 in the quarter
ended March 31, 2000 from $19,093,000 in the quarter ended March 31, 1999. As a
percentage of net sales, gross margin decreased to 9.69% for the three months
ended March 31, 2000 from 11.33% for the corresponding period in 1999. This
decrease is a result of a shift in the relative mix of products being sold and a
higher proportion of large orders on which we extend volume discounts to
customers.
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
-9-
<PAGE>
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 8% to $14,701,000 in the
three months ended March 31, 2000 from $13,627,000 in the same period a year ago
due to the acquisition of Enlaces and necessary increases in personnel costs,
higher depreciation costs incurred as a result of additions to our
infrastructure, and a higher amortization expense as a result of increased
goodwill related to acquisitions and earnouts paid on past acquisitions. As a
percentage of net sales, selling, general and administrative expenses were 7.58%
for the three months ended March 31, 2000, compared to 8.08% for the same period
in 1999. 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 8% to $681,000 in the three months ended
March 31, 2000 versus the same period in 1999 due to the company's focus on
tightly managing its cash position and using its bank lines as little as
possible.
Our effective tax rate is 42% versus the statutory rate of 34% due
primarily to non-deductible goodwill and other expenses, state income taxes and
foreign taxes in excess of the federal statutory rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities during the three months ended
March 31, 2000 totaled $18,902,000 compared to $9,318,000 for the three months
ended March 31, 1999. Net cash from operating activities was reduced primarily
by the decrease in accounts payable of $28,559,000 which was due to a decrease
in revenues during the three months ended March 31, 2000 from the three months
ended December 31, 1999.
Net cash used in investing activities during the three months ended
March 31, 2000 was $1,258,000 compared to net cash used in investing activities
of $3,891,000 during the three months ended March 31, 1999. Investing activities
in the three months ended March 31, 2000 consisted of continuing leasehold and
computer hardware and software investments made at our headquarters, sales
office, warehouse and integration center sites and other investments.
Net cash provided by financing activities during the three months ended
March 31, 2000 was $16,148,000 compared to $15,641,000 provided during the three
months ended March 31, 1999. Financing activities in the three months ended
March 31, 2000 primarily consisted of net borrowings under the IBMCC Credit
Facility, which were used for general working capital purposes.
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. For the period December 27, 1999
through July 21, 2000 the line was temporarily increased to $145,000,000. The
IBMCC Credit Facility is renewable in September 2000 and contains restrictive
covenants which include the maintenance of minimum current ratio, tangible net
worth and times interest earned ratio, as defined, and is collateralized by
substantially all assets of the Company. As of March 31, 2000 the Company had
outstanding borrowings under this agreement of $114,696,000. Of the total
outstanding borrowings, $24,236,000 represented cash advances at March 31, 2000,
with the remainder included in accounts payable which amounted to $90,460,000.
Cash advances bear interest at prime (9% at March 31, 2000) plus 1.875%. Based
on eligible assets, as of March 31, 2000, the Company had borrowings available
of approximately $16,826,000.
We believe that our existing cash and available bank borrowings are
sufficient to fund our operations through the end of 2000.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
RISKS RELATED TO THE PROPOSED ACQUISITION OF US BY AVNET
THE EXPECTED BENEFITS OF COMBINING AVNET AND SAVOIR MAY NOT BE REALIZED
We entered into the merger agreement with Avnet with the expectation
that the merger will result in benefits to the combined companies, including
reduced costs as a percentage of sales due to increased economies of scale,
greater access to capital, stronger buying power with our vendors and broader
offerings of products to our customers. If we are not able to integrate
effectively our technology, operations and personnel in a timely and efficient
manner, then the benefits of the merger will not be realized, and, as a result,
the combined companies' operating results and the market price of Avnet's common
stock may be adversely affected. In particular, if the integration is not
successful we may lose key personnel and we may not be able to retain our
customers.
In addition, the attention and effort devoted to the integration of the
two companies will significantly divert management's attention from other
important issues, and could significantly harm the combined companies' business
and operating results.
FAILURE TO COMPLETE THE PROPOSED MERGER COULD HARM OUR STOCK PRICE AND
FUTURE BUSINESS AND OPERATIONS
If the merger is not completed for any reason, we may be subject to a
number of material risks, including the following:
o We may be required to pay Avnet a termination fee of $750,000,
and we may be required to pay Avnet an additional fee of $3.75
million if we enter into an acquisition agreement with another
company within a year of termination of the Avnet merger
agreement;
o The price of our common stock may decline to the extent that the
current market price of our common stock reflects a market
assumption that the merger will be completed; and
o Costs related to the merger, such as legal, accounting and
financial advisor fees, must be paid even if the merger is not
completed.
In addition, our customers may, in response to the announcement of the
merger, delay or defer purchasing decisions. Any delay or deferral in purchasing
decisions by our customers could materially and adversely affect our business,
regardless of whether the merger is ultimately completed. Similarly, our current
and prospective employees may experience uncertainty about their future role
with Avnet until Avnet's strategies with regard to Savoir are announced or
executed. This may adversely affect our ability to attract and retain key
management, marketing and technical personnel.
Further, if the merger agreement is terminated and our board of
directors determines to seek another merger or business combination, we may be
unable to find a partner willing to pay an equivalent or more attractive price
than the price proposed to be paid in the merger. In addition, while the merger
agreement is in effect and subject to limited exceptions, we are prohibited from
soliciting, initiating or inducing or entering into certain extraordinary
transactions, such as a merger, sale of assets or other business combination,
with any party other than Avnet. We granted Avnet an option to purchase shares
of our common stock, and if the merger agreement is terminated, because of that
option, we may not be able to account for future transactions as a "pooling of
interests."
RISKS RELATED TO OUR BUSINESS
THE FOLLOWING RISK FACTORS INCLUDE RISKS RELATED TO OUR BUSINESS
WITHOUT TAKING INTO ACCOUNT THE PROPOSED MERGER. RISKS SUCH AS THOSE RELATING TO
STRATEGIC ACQUISITIONS MAY NOT APPLY IF THE PROPOSED MERGER IS COMPLETED.
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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, 1999 and the quarter ended March 31, 2000, approximately 82% and
85% respectively, of our net sales were generated from the sale of IBM products,
and we expect this percentage to remain constant in 2000. Our agreement with IBM
is non-exclusive and may be unilaterally modified by IBM upon 30 days' written
notice, renews automatically but may be terminated by IBM upon written notice
given not less than 90 days prior to the renewal date (January 1, 2001),
provides no franchise rights and may not be assigned by us. The continued
consolidation of wholesale distributors of commercial mid-range servers may also
result in IBM raising the sales volume threshold required to maintain most
favorable volume discount status. As part of our business strategy, and in order
to maintain most favorable volume discount status with IBM, we have completed
multiple acquisitions and we are actively engaged in an ongoing search for
additional acquisitions. We are also seeking to make minority equity investments
in potential large customers for similar purposes. However, we cannot assure you
that we will be successful in completing any future acquisitions or in making
any equity investments. If we are unable to complete other acquisitions or make
equity investments, or are otherwise unable to increase our sales volume through
internal growth, we could lose our most favorable volume discount status with
IBM, which would, in turn, have a material adverse effect on our relationship
with IBM and on our business, financial condition and results of operations. The
occurrence of any of the following events could have a material adverse effect
upon our business, financial condition and results of operations:
o any disruption, change or termination in our relationship with IBM
or in the manner in which IBM distributes its products;
o the failure of IBM to develop new products which are accepted by
our customers;
o our failure to continue to achieve sufficient sales volumes of
certain IBM products or to maintain the required infrastructure,
in each case as required to maintain most favorable volume
discount status; and
o the addition of other wholesale distributors by IBM.
We receive market development funds and other incentives from IBM. These market
development and incentive funds directly affect our gross profit and our sales
and marketing expenses. Any change in the availability of these market
development and incentive funds would have a material adverse effect on our
business, financial condition and results of operations.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER
Our quarterly net sales and operating results may vary significantly as
a result of a variety of factors, including, but not limited to:
o changes in the supply and demand for commercial mid-range servers,
peripheral equipment, software and related services;
o the cost, timing and integration of acquisitions;
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;
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o changes in market development or other promotional funds;
o product supply shortages;
o disruption of warehousing or shipping channels;
o inventory adjustments;
o increases in the amount of accounts receivable written off;
o price competition; and
o changes in the mix of products sold through distribution channels
and in the mix of products purchased by OEMs.
Our operating results could also be adversely affected by:
o general economic and other conditions affecting the timing of
customer orders and capital spending;
o a downturn in the market for commercial mid-range servers; and
o order cancellations or rescheduling.
In addition, historically a substantial portion of our net sales has been made
in the last few days of a quarter. Our quarterly operating results are therefore
difficult to predict and delays in the closing of sales near the end of a
quarter could cause quarterly net sales to fall substantially short of
anticipated levels and, to a greater degree, adversely affect profitability.
Thus, we believe that period-to-period comparisons of our operating results are
not necessarily meaningful and should not be relied upon as an indication of our
future performance. Our future operating results are expected to fluctuate as a
result of these and other factors, which could have a material adverse effect on
our business, financial condition and results of operations and on the price of
our common stock. It is possible that in future periods our operating results
may be below the expectations of securities analysts and investors. If this
happens, it is likely that the market price of our common stock would be
materially and adversely affected.
WE FACE SUBSTANTIAL COMPETITION
The markets in which we operate are highly competitive. Competition is
based primarily on:
o product availability;
o price;
o credit availability;
o speed of delivery;
o ability to tailor specific solutions to customer needs; and
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.
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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., Hall-Mark Global Solutions, a subsidiary of
Avnet, Inc., and Pioneer Standard Electronics, Inc. In some limited
circumstances, we also compete with our own vendors.
In the distribution of storage products, we compete with national,
regional and local distributors. Through our Computers and Peripherals Group, we
compete with contract manufacturers, systems integrators and assemblers of
computer products. We have experienced, and expect to continue to experience,
increased competition from current and potential competitors, many of which have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base than
we do. Accordingly, present or future competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than we can. Competitors that are larger than Savoir may be able to
obtain more favorable pricing and terms from vendors than we can. As a result,
we may be at a disadvantage when competing with these larger companies. If we
fail to compete effectively, our business, financial condition and results of
operations would be materially and adversely affected.
SIRIUS COMPUTER SOLUTIONS, LTD. ACCOUNTS FOR 18% OF OUR NET SALES
During the year ended December 31, 1999 and the quarter ended March 31,
2000, sales to Sirius Computer Solutions, Ltd. accounted for approximately 16%
and 18%, respectively, of our net sales. Our sales to Sirius are made under the
Industry Remarketer Affiliate Agreement between Savoir and Sirius dated as of
September 30, 1997, under which we appointed Sirius as one of our industry
remarketer affiliates for IBM products. This agreement provides that Sirius may
not enter into any similar arrangement with any third party for the purpose of
selling IBM products to its end user customers and also provides a favorable
pricing structure to Sirius. As a result, Sirius is expected to remain our
largest customer for the duration of this agreement and to account for
approximately the same percentage of our net sales in 2000 as it represented in
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 twelve acquisitions. The
combination of our business and acquired businesses requires, among other
things:
o integration of the respective management teams and sales and other
personnel;
o coordination of sales and marketing efforts;
o conversion of computer systems (including inventory control, order
entry and financial reporting); and
o integration of the businesses' products and physical facilities.
The difficulties of such integration may be increased by the necessity of
coordinating geographically separate organizations. The integration of
operations will require the dedication of management resources which may
temporarily divert attention away from the day-to-day business of the combined
company. We cannot assure you that the required coordination and integration
will be accomplished smoothly or successfully. Our inability to integrate
successfully the operations of acquired businesses could have a material adverse
effect on our business, financial condition and results of operations. In
addition, during the integration phase, aggressive competitors may attempt to
attract our customers and recruit our key employees. We cannot assure you that
acquisitions will not materially and adversely affect the selling patterns of
vendors and the buying patterns of our present and potential
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customers, and that any change in these patterns will not materially and
adversely affect our business, financial condition and results of operations.
Our ability to achieve the anticipated benefits of our acquisitions
depends in part upon whether the integration of our business and any acquired
business is accomplished in an efficient and effective manner, and we cannot
assure you that this will occur. Our previous acquisitions and investments have
placed and will, together with future acquisitions, continue to place,
substantial demands on our management team and financial resources. The
integration of the operations of acquired companies has on occasion been slower,
more complex and more costly than we originally anticipated. We will encounter
similar uncertainties and risks in any future acquisitions and investments.
Although we expect to realize cost savings and sales enhancements as a result of
the recent and proposed acquisitions, we cannot assure you that these savings or
enhancements will be realized in full or when anticipated, or that any cost
savings will not be offset by increases in other expenses.
WE MAY NOT BE ABLE TO COMPLETE THE FUTURE ACQUISITIONS AND EXPANSION
THAT WE BELIEVE ARE IMPORTANT TO THE GROWTH OF OUR BUSINESS
Acquisitions have played an important role in the implementation of our
business strategy, and we believe that additional acquisitions are important to
our growth, development and continued ability to compete effectively in the
marketplace. We evaluate potential acquisitions and strategic investments on an
ongoing basis. We cannot assure you as to our ability to compete successfully
for available acquisition or investment candidates or to complete future
acquisitions and investments or as to the financial effect on us of any acquired
businesses or equity investments. Any future acquisitions and investments we
might make may involve significant cash expenditures and may result in increased
indebtedness, interest and amortization expense or decreased operating income,
any of which could have a material adverse effect on our business, financial
condition and results of operations. In addition, future growth will require
additional financing to fund the working capital requirements of our business
and to finance future acquisitions and strategic equity investments, if any. We
cannot assure you that we will be able to raise financing on satisfactory terms
and conditions, if at all. Should we be unable to implement successfully our
acquisition and investment strategy, our business, financial condition and
results of operations could be materially and adversely affected.
WE MAY HAVE DIFFICULTY IN MANAGING OUR GROWTH
Since 1997, we have experienced significant growth in the number of our
employees and in the scope of our operating and financial systems, resulting in
increased responsibilities for our management. To manage future growth
effectively, we will need to continue to improve our operational, financial and
management information systems, procedures and controls and expand, train,
motivate, retain and manage our employee base. We cannot assure you that we will
be successful in managing any future expansion or identifying, attracting and
retaining key personnel, and failure to do so could have a material adverse
effect on our business, financial condition and results of operations.
WE ARE DEPENDENT ON KEY PERSONNEL
Our future success depends in part on the continued service of our key
management, technical, sales and marketing personnel and our ability to identify
and hire additional personnel. Competition for qualified management, technical,
sales and marketing personnel is intense and we cannot assure you that we can
retain and recruit adequate personnel to operate our business. Our success is
largely dependent on the skills, experience and efforts of our key personnel,
particularly P. Scott Munro, Chairman of the Board, Chief Executive Officer and
Secretary, and Carlton Joseph Mertens, II, President and Chief Operating
Officer, each of whom has entered into an employment agreement with us. The loss
of either of these individuals or other key personnel could have a material
adverse effect on our business, financial condition and results of operations.
We maintain life insurance on Mr. Munro and Mr. Mertens in the amounts of $7.9
million and $10.0 million, respectively.
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WE HAVE SIGNIFICANT FUTURE CAPITAL NEEDS, AND THE AVAILABILITY OF
ADDITIONAL FINANCING IS UNCERTAIN
Our operations to date have required substantial amounts of working
capital to finance accounts receivable and product inventories. Although we
believe that we have sufficient funds, or alternate sources of funds, to carry
on our business as presently conducted through 2000, we will need to raise
additional amounts through public or private debt or equity financings in order
to achieve the growth contemplated by our business plan. We cannot assure you
that additional financing of any type will be available on acceptable terms, or
at all, and failure to obtain such financing could have a material adverse
effect upon our business, financial condition and results of operations.
WE ARE DEPENDENT UPON THE AVAILABILITY OF CREDIT AND OUR PRESENT CREDIT
FACILITY
In order to obtain necessary working capital, we rely primarily on a
line of credit that is collateralized by substantially all of our assets. The
amount of credit available to us may be adversely affected by numerous factors
beyond our control, such as:
o delays in collection or deterioration in the quality of our
accounts receivable;
o economic trends in the technology industry;
o the obsolescence of our inventory;
o interest rate fluctuations; and
o the lending policies of our creditors.
Any decrease or material limitation on the amount of capital available to us
under our line of credit or other financing arrangements will limit our ability
to fill existing sales orders or expand our sales levels and, therefore, would
have a material adverse effect on our business, financial condition and results
of operations. In addition, any significant increase in interest rates will
increase our cost of financing and could have a material adverse effect on our
business, financial condition and results of operations. We are dependent on the
availability of accounts receivable financing on reasonable terms and at levels
that are high relative to our equity base in order to maintain and increase our
sales. We cannot assure you that such financing will continue to be available to
us or available under terms acceptable to us. Our inability to have continuous
access to such financing at reasonable costs would materially and adversely
impact our business, financial condition, results of operations and cash flows.
We have primarily funded our working capital requirements through a
$125 million Inventory and Working Capital Agreement with IBM Credit
Corporation. Borrowings under this credit facility are collateralized by
substantially all of our assets, including accounts receivable, inventories and
equipment. This credit facility provides that the outstanding interest-bearing
cash advance balance is subject to interest at the annual rate of prime plus
1.875% (10.875% at March 31, 2000) and expires on August 31, 2000. IBM Credit
Corporation may terminate this credit facility at any time upon the occurrence
of, and subsequent failure to cure, an "Event of Default" (as that term is
defined in the documentation for the credit facility). In the event of
termination, the outstanding borrowings under the credit facility become
immediately due and payable. The termination of this credit facility and our
subsequent inability to secure a replacement credit facility on terms and
conditions no less favorable than those contained in our present credit facility
would have a material adverse effect on our business, financial condition and
results of operations.
OUR PRESENT CREDIT FACILITY LIMITS OUR ABILITY TO INCUR ADDITIONAL
INDEBTEDNESS
The terms of our credit facility with IBM Credit Corporation require
that we obtain the consent of IBM Credit Corporation prior to incurring some
types of additional indebtedness, including any 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
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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 Credit Corporation will not so consent, we cannot
assure you that IBM Credit Corporation will give its consent. Failure to obtain
IBM Credit Corporation's consent or to obtain an alternate credit facility could
have a material adverse effect on our business, financial condition and results
of operations.
OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, PRICE REDUCTIONS
AND INVENTORY RISK
Since we acquire inventory in advance of product orders and shipments,
there is a risk that we will forecast incorrectly and stock excessive or
insufficient inventory of particular products. The markets for products that we
sell are extremely competitive and are characterized by declining selling prices
over the life of a particular product and rapid technological change. Therefore,
our business, like that of other wholesale distributors, is subject to the risk
that the value of our inventory will decline as a result of price reductions by
manufacturers or due to technological changes affecting the usefulness or
desirability of our product inventory. It is the policy of many manufacturers of
technology products to protect wholesale distributors such as Savoir from the
loss in value of inventory due to technological change or reductions in the
manufacturers' prices. Under the terms of most of our distribution agreements,
vendors will generally credit us for inventory losses resulting from the
vendor's price reductions if we comply with the conditions set forth in those
agreements. In addition, generally under such agreements, we have the right to
return for credit or exchange for other products a portion of our slow moving or
obsolete inventory items within designated periods of time. We cannot assure you
that, in every instance, we will be able to comply with all necessary conditions
or manage successfully our price protection or stock rotation opportunities, if
available. Also, a manufacturer that elects to terminate a distribution
agreement generally will repurchase its products carried in a wholesale
distributor's inventory. These industry practices are sometimes not included in
written agreements and do not protect us in all cases from declines in inventory
value, excess inventory or product obsolescence. We cannot assure you that
manufacturers will continue these protective practices or that we will be able
to manage successfully our existing and future inventories. Historically, we
have not experienced losses due to obsolete inventory in excess of established
inventory reserves. Significant declines in inventory value in excess of
established inventory reserves or dramatic changes in prevailing technology
could have a material adverse effect on our business, financial condition and
results of operations.
OUR BUSINESS HAS LOW PROFIT MARGINS
As a result of price competition, we have low gross profit and
operating income margins. These low margins magnify the impact on operating
results of variations in net sales and operating costs. We have partially offset
the effects of our low gross profit margins by increasing net sales, availing
ourselves of large volume purchase discount opportunities and reducing selling,
general and administrative expenses as a percentage of net sales. However, we
cannot assure you that we will maintain or increase net sales, continue to avail
ourselves of large volume purchase discount opportunities or further reduce
selling, general and administrative expenses as a percentage of net sales.
Future gross profit margins may be materially and adversely affected by changes
in product mix, vendor pricing actions and competitive and economic pressures.
WE MAY EXPERIENCE PRODUCT SUPPLY SHORTAGES
We are dependent upon the supply of products available from our
vendors. From time to time, the industry has experienced shortages of some of
the products that we distribute due to vendors' difficulty in projecting demand.
When product shortages occur, we typically receive an allocation of product from
the vendor. We cannot assure you that our vendors will be able to maintain an
adequate supply of products to fulfill all of our orders on a timely basis. If
we fail to obtain adequate product supplies, or if product supplies are
available to competitors but not to us, it would have a material adverse effect
on our business, financial condition and results of operations.
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WE EXTEND CREDIT TO CUSTOMERS WITHOUT REQUIRING COLLATERAL
We sell products to a broad geographic and demographic base of
customers and offer unsecured credit terms to our customers. Sirius accounted
for approximately 20% of our outstanding accounts receivable at March 31, 2000.
No other single customer accounted for more than 10% of our outstanding accounts
receivable at March 31, 2000. To reduce our credit risk, we perform ongoing
credit evaluations of our customers, maintain an allowance for doubtful accounts
and have credit insurance. Historically, we have not experienced losses from
write-offs in excess of established reserves. Should our customers increase the
rate at which they default on payments due to us, and should we be unable to
collect our accounts receivable at a rate consistent with our present
experience, it could have a material adverse effect on our business, financial
condition and results of operations.
OUR BUSINESS IS SEASONAL
The computer distribution industry experiences seasonal trends and,
within each quarter, a substantial amount of product is generally sold in the
last few days of the quarter. Our largest vendor, IBM, historically has sold up
to 35% of its products in the last calendar quarter, and the continuation of
this pattern could have an effect on our quarterly net sales. Historically, a
substantial portion of our net sales has been made in the last few days of a
quarter. Due to our recent significant growth through acquisitions and our
increased dependence on the sale of IBM products, sales variations may be
magnified in the future and could have a material adverse effect on our
business, financial condition and results of operations.
OUR ABILITY TO EXPAND OUR SERVICE CAPABILITIES IS UNCERTAIN
We are expanding the nature and scope of our value-added services. We
cannot assure you that new value-added services will be integrated successfully
with our commercial mid-range server and related products distribution business.
If we are unable to provide value-added services effectively, we may be unable
to compete for the business of customers that demand services as a condition to
purchasing products from us. In addition, we will be subject to risks commonly
associated with a value-added services business, including dependence on
reputation, fluctuations in workload and dependence on the ability to identify,
recruit and retain qualified technical personnel. The expansion of our
value-added services is expected to require a significant capital investment,
including an increase in the number of technical employees. We cannot assure you
that difficulties encountered in connection with the expansion of our
value-added services will not have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT ON THIRD-PARTY SHIPPERS
We presently ship a majority of our products from our warehouses via
Federal Express Corporation, but we also ship via United Parcel Service of
America, Inc. and other common carriers. In addition, we drop-ship
products from our vendors directly to our customers via these carriers. Changes
in shipping terms or the inability of Federal Express, United Parcel Service or
any other third-party shipper to perform effectively (whether as a result of
mechanical failure, casualty loss, labor stoppage, other disruption or any other
reason) could have a material adverse effect on our business, financial
condition and results of operations. We cannot assure you that we can maintain
favorable shipping terms or replace our present shipping services on a timely or
cost-effective basis.
OUR PLANNED INTERNATIONAL EXPANSION MAY NOT BE SUCCESSFUL
One of the elements of our business strategy is to expand
internationally. We are currently distributing IBM products in Canada and
Mexico. We cannot assure you that we will be able to continue to expand our
international business successfully. Risks inherent in doing business on an
international level include:
o management of remote operations;
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o unexpected changes in regulatory requirements;
o export restrictions;
o tariffs and other trade barriers;
o difficulties in staffing and managing foreign operations;
o longer payment cycles;
o problems in collecting accounts receivable;
o political instability;
o fluctuations in currency exchange rates; and
o potentially adverse tax consequences.
Any of these risks could adversely impact the success of our international
operations. We cannot assure you that difficulties encountered with one or more
of these factors will not have a material adverse effect on our future
international operations and, consequently, on our business, financial condition
and results of operations.
WE HAVE NOT PAID AND DO NOT PRESENTLY INTEND TO PAY CASH DIVIDENDS ON
SAVOIR COMMON STOCK
We have never declared or paid a cash dividend on our common stock. We
currently anticipate that we will retain all available funds for use in the
operation of our business, including possible acquisitions, and we do not intend
to pay any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of our Board of Directors and will depend
upon, among other factors:
o future earnings and cash flow;
o operations;
o capital requirements;
o acquisitions and strategic investment opportunities;
o our general financial condition; and
o general business conditions.
Further, our ability to pay cash dividends is currently restricted by the terms
of our credit facility with IBM Credit Corporation. The terms of future
credit facilities or other agreements may also contain similar restrictions. In
addition, our Certificate of Designation with respect to the Series A Preferred
Stock prohibits the payment of dividends on our common stock unless and until
dividends are paid on the Series A Preferred Stock in accordance with its terms.
IF WE ISSUE STOCK IN CONNECTION WITH FUTURE ACQUISITIONS, IT MAY RESULT
IN DILUTION TO EXISTING STOCKHOLDERS
We may issue additional shares of our common stock or other equity or
convertible debt securities to effect future acquisitions or for other corporate
purposes. Upon the issuance of additional capital stock, the percentage
ownership of our stockholders will be reduced and stockholders may experience
additional dilution.
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OUR STOCK PRICE HAS BEEN VOLATILE HISTORICALLY
The market price of our common stock has been and is likely to continue
to be highly volatile and may be significantly affected by factors such as:
o actual or anticipated fluctuations in our quarterly operating
results;
o announcements of technological innovations;
o industry conditions and trends;
o changes in or our failure to meet the expectations of securities
analysts and investors; and
o general market conditions and other factors.
It is possible that in some future quarter, our operating results may be below
the expectations of securities analysts and investors. If this occurs, the price
of our common stock would likely decline, perhaps substantially. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices of the stocks of
technology companies. These broad market fluctuations may adversely affect the
market price of our common stock. In the past, following periods of volatility
in the market price of a particular company's securities, securities class
action litigation has often been brought. We cannot assure you that similar
litigation will not occur in the future with respect to us and our securities.
Any litigation relating to our securities could result in substantial costs and
a diversion of management's attention and resources, which could have a material
adverse effect upon our business, financial condition and results of operations.
PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW MAY MAKE SAVOIR A
LESS ATTRACTIVE ACQUISITION CANDIDATE
Provisions of our Certificate of Incorporation and of our Bylaws may
make it more difficult for a third party to acquire, or may discourage a third
party from attempting to acquire, control of Savoir. These provisions could
limit the price that investors may be willing to pay for shares of our common
stock. We presently have 1,850,012 shares of Series A Preferred Stock
outstanding and, without any further vote or action by the stockholders, have
the authority to issue up to an additional 8,149,978 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.
Certain of the Company's operations, primarily its international
subsidiaries, occasionally purchase and sell products in currencies other than
their functional currencies. This subjects the Company to the risks associated
with fluctuations of foreign currency exchange rates. The Company reduces this
risk by utilizing natural hedging (offsetting receivables and payables). The
Company does not hedge either its investments in its foreign operations or its
floating interest rate exposures.
The Company's primary interest rate exposure results from the revolving
credit facility's floating rate pricing mechanism. If interest rates were to
increase 100 basis points from March 31, 2000 levels, the additional annual
expense would be approximately $200,000 on a pre-tax basis.
-20-
<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 us. 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,
Mr. Adams' complaint seeks to recover compensatory damages in the amount of
$10.0 million and punitive damages according to proof. Mr. Adams has
subsequently dismissed without prejudice his cause of action for accounting. We
believe the complaint is without merit and intend to defend ourselves vigorously
against this complaint. In addition, we have filed a cross-complaint for breach
of contract in which we are seeking compensatory damages in the amount of $1.5
million. The case has been set for trial on November 27, 2000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 2, 2000 we issued an option to purchase up to 2,023,435 shares
of our common stock to Avnet, Inc. The option is exercisable at $6.83 per share.
The option was issued in connection with our entering into an agreement to merge
with a subsidiary of Avnet. The option will become exercisable if Avnet becomes
entitled to receive a termination fee under section 4.9 of the Merger Agreement.
The option was issued under the exemption provided by Section 4(2) of the
Securities Act of 1933. The option was issued to a single accredited investor.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A. EXHIBITS.
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference (as stated therein) as part of this report on Form
10-Q.
B. REPORTS ON FORM 8-K.
No reports on Form 8-K, or amendments to previously filed reports on
Form 8-K, were filed during the quarter ended March 31, 2000.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Registrant:
SAVOIR TECHNOLOGY GROUP, INC.
Dated: May 15, 2000 By /s/ P. Scott Munro
-----------------------------------------
P. Scott Munro
Chief Executive Officer
(Principal Executive Officer)
Dated: May 15, 2000 By /s/ Terry V. Johnson
-----------------------------------------
Terry V. Johnson
Chief Financial Officer
(Principal Financial and
Accounting Officer)
-22-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
2.1 Amended and Restated Agreement and Plan of Merger dated as of March
2, 2000 between Avnet, Tactful Acquisition Corp and the Company,
filed as Exhibit 2.1 to Avnet, Inc.'s Registration Statement on Form
S-4, filed with the Commission on May 12, 2000, and incorporated
herein by this reference.
2.2 Stock Option Agreement dated as of March 2, 2000 between the Company
and Avnet, filed as Exhibit 2.3 to Avnet, Inc.'s Registration
Statement on Form S-4, filed with the Commission on May 12, 2000, and
incorporated herein by this reference.
3(i)(a) Restated Certificate of Incorporation of Savoir Technology Group,
Inc., a Delaware corporation, filed as Exhibit 3(ii) to the Company's
Current report on Form 8-K dated July 23, 1998, filed on August 14,
1997, and incorporated herein by this reference.
3(i)(b) Certificate of Amendment of 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.
3(i)(c) Certification of Designation, Preferences and Rights of the Company's
Series B Preferred Stock, filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K dated October 10, 1997, and incorporated
herein by this reference.
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 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.
4.2 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.
4.3 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.
4.4 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.
4.5 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.
4.6 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.
-23-
<PAGE>
4.7 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 to Inventory and Working Capital Financing Agreement, dated
as of January 31, 2000, by and among the Company, Business Partners
Solutions, Inc., MCBA Systems, Inc. and IBM Credit Corporation.
10.2* Consulting and Noncompetition Agreement dated as of March 2, 2000, by
and among the Company, Tactful Acquisition Corp., and P. Scott Munro.
27.1 Financial Data Schedule.
- -----------------
* Indicates management contract or compensation plan or arrangement.
-24-
EXHIBIT 10.1
AMENDMENT
TO
INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT
This AMENDMENT TO THE INVENTORY AND WORKING CAPITAL FINANCING AGREEMENT
(this "Amendment") is made as of January 31, 2000 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) the Term Loan be restructed,
including an increase in the principal amount, and (ii) the Credit Line be
temporarily increased, 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:
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 Commitment Fee described in Part I(L)(ii) is renamed to be an
"Unused Line Fee" and is revised to "from and including January 1,
2000, one half of one percent (0.50%) per annum of the difference
between the then current Credit Line (including any temporary increases
or decreases then in effect) and the Average of the sum of the Product
Advances, PRO Advances and WCO Advances calculated and billed at the
end of each month".
(b) The Term Loan Commitments in Attachment A, Part I(H) are revised to:
"Term A Loan: Fifteen Million Two Hundred Dollars ($15,000,200.00)
Term B Loan: n/a"
Page 1 of 3
<PAGE>
(c) Terms of the Terms Loans described in Attachment A, Part I(H) are
revised as follows:
(i) Finance Charges:
Term A Loan: Prime Rate plus 2.50% (effective January 1, 2000)
(ii) Repayment: The repayment schedule for the Term Loan Advances
described in the parenthetical note is revised to
"(Note: Beginning January 1, 2000 and continuing
through the Stated Maturity Date, the outstanding
Term Loan Advances will be repaid in one principal
payment of $1,666,600.00 in January, 2000, 15
equal monthly principal payments of $8333,333.33
due on the 25th of each month beginning in March,
2000, and a final principal payment due on June
25, 2001 of $833,600.05 as well as interest on the
remaining principal. If the Prime Rate changes
during this period, the monthly interest payments
will be recalculated over the remaining term at
the new Term Loan Finance Charge)."
(iii) Maturity Date: The Stated Maturity Date for the Term A Loan is
changed to June 25, 2001 (from September 30, 2000)
and the repayment terms are revised as described
in Attachment A.
(d) Customer shall be required to maintain the following financial
percentage(s) and ratio(s) as of the last day of the fiscal period
under review by IBM Credit:
<TABLE>
<CAPTION>
COVENANT FYE 12/99 QTR. 3/00 QTR. 6/00 QTR. 9/00 FYE 12/00 QTR. 3/01+
<S> <C> <C> <C> <C> <C> <C>
(i) Net Profit after .10% .80% 1.00% 1.25% 1.50% 1.50%
Tax to Revenue
Equal to or Greater
than
(ii) Current Assets to 1.025:1.00 1.025:1.00 1.025:1.00 1.05:1.00 1.05:1.00 1.10:1.00
Current Liabilities
Greater than
(iii) Tangible Net Worth $0 $2,500 $5,000 $10,000 $15,000 $20,000
(in $K) Equal to or
Greater than
</TABLE>
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/ Dennis Polk By: /s/Terry Johnson
------------------------------------ -------------------------------
Print Name: Dennis Polk Print Name: Terry Johnson
----------------------------- -----------------------
Title: SVP-Corporate Finance Title: CFO
--------------------------------- ----------------------------
Date: 2/7/00 Date: 2/7/00
---------------------------------- -----------------------------
IBM CREDIT CORPORATION MCBA SYSTEMS, INC.
By: /s/ Heather Jepson By: /s/ Terry Johnson
------------------------------------ -------------------------------
Print Name: Heather Jepson Print Name: Terry Johnson
----------------------------- -----------------------
Title: Region Credit Manager Title: CFO
--------------------------------- ----------------------------
Date: 2/10/00 Date: 2/7/00
---------------------------------- -----------------------------
Page 3 of 3
<PAGE>
ATTACHMENT A, EFFECTIVE DATE January 31, 2000 ("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 Two Hundred Dollars
($15,000,200.00)
(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 1tot
<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) 50% 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 $10,000,000.00. 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 2.500%
(Note: Beginning January 1, 2000 and continuing through the
Stated Maturity Date, the outstanding Term Loan Advances will
be repaid in one principal payment of $1,666,600.00 in
January, 2000, fifteen equal monthly principal payments of
$833,333.33 due on the 25th of each month beginning March,
2000, and a final principal payment due on June 25, 2001 of
$833,600.05 as well as interest on the remaining principal. If
the Prime Rate changes during this period, the monthly
Page 2 of 2tot
<PAGE>
interest payments will be recalculated over the remaining term
at the new Term Loan Finance Charge).
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) Unused Line Fee: one half of one percent (0.50%)
per annum of the difference
between the then current Credit
Line (including any temporary
increases or decreases then in
effect) 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 3tot
<PAGE>
II. Bank Account
(A) Customer's 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: ___________3 Tasman Drive______________________________________________
___________________Santa Clara, CA 95054________________________________________
Phone: _____________(408) 654-7400______________________________________________
Account # ___3418ZZ770_(operating account)__________________________
Page 4 of 4tot
<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).
Consolidated Net Income shall mean, for any period, the net income (or
loss), after taxes, of Customer on a consolidated basis for such period
determined in accordance with 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 5tot
<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 6tot
<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, (v) leasehold improvement expenditures and
(vi) all provisions for U.S. and non U.S.
Federal, state and local taxes.
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 7tot
<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 September 30, 1999;
greater than 1.025 : 1.0 from on and after October 1, 1999
through and including June 30, 2000; greater than 1.05 : 1.0
from on and after July 1, 2000 through and including December
31, 2000; greater than 1.10 :1.0 beginning January 1, 2001 and
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 September 30, 1999;
0.10 percent from on and after October 1, 1999 through and
including December 31, 1999; equal to or greater than 0.80
percent from on and after January 1, 2000 through and including
March 31, 2000; equal to or greater than 1.0 percent from on
and after April 1, 2000 through and including June 30, 2000;
equal to or greater than 1.25 percent from on and after July 1,
2000, through and including September 30, 2000; equal to or
greater than 1.50 percent from on and after October 1, 2000 and
thereafter;
c) Tangible Net Worth equal to or greater then $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 $0.0M from on
October 1, 1999 through and including December 31, 1999; equal
to or greater than $2.5 million from on January 1, 2000,
through and including March 31, 2000; equal or greater than
$5.0 million from on April 1, 2000, through and including June
30, 2000; equal to or greater than $10.0 million from on July
1, 2000 through and including September 30, 2000; equal to or
greater than $15.0 million from on October 1, 2000, through and
including December 31, 2000; equal to or greater than $20
million from
Page 8 of 8tot
<PAGE>
on January 1, 2001 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
Page 9 of 9tot
<PAGE>
IV. Additional Conditions Precedent Pursuant to Section 5.1 (K) of the
Agreement:
o Executed Contingent Blocked Account Amendments;
o Executed Waiver of Landlord Lien for all premises in which a
landlord has the right of levy for rent;
o 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;
o Fiscal year-end financial statements of Customers as of end of
Customers' prior fiscal year audited by an independent
certified public accountant;
o A Certificate of Location of Collateral whereby each Customer
certifies where Customer presently keeps or sells inventory,
equipment and other tangible Collateral;
o 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;
o Listing of all creditors providing accounts receivable
financing to Customers;
o A Collateral Management Report in the form of Attachment F as
of the Closing Date;
o 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;
o 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;
o 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;
o Termination or release of Uniform Commercial Code filing by
other creditors as required by IBM Credit;
o A copy of an all-risk insurance certificate pursuant to Section
7.8 (B) of the Agreement;
o Payment of the Closing Fee an the Closing Date;
Page 10 of l0tot
EXHIBIT 10.2
CONSULTING AND NONCOMPETITION AGREEMENT
This Consulting and Noncompetition Agreement (the "Agreement"), is
entered into as of March 2, 2000, by and among Savoir Technology Group, Inc., a
Delaware corporation (the "Company"), Tactful Acquisition Corp., a Delaware
corporation ("Buyer"), and P. Scott Munro ("Munro").
W I T N E S S E T H
WHEREAS, Munro and the Company have entered into a letter agreement
dated May 1, 1998 and an Executive Retention Agreement dated as of May 10, 1999
(the "Retention Agreement"), setting forth the terms and conditions of Munro's
employment as President and Chief Executive Officer of the Company, and certain
additional terms and conditions relating thereto;
WHEREAS, Avnet, Inc., a New York corporation ("Parent"), Buyer and
Company propose on the date hereof to enter into an Agreement and Plan of Merger
(the "Merger Agreement"), pursuant to which Buyer will be merged (the "Merger")
with and into Company, which will continue as the surviving corporation (the
"Surviving Corporation"), all on the terms and subject to the conditions
contained in the Merger Agreement (capitalized terms not otherwise defined
herein having the respective meanings set forth in the Merger Agreement);
WHEREAS, immediately after the Merger, the Surviving Corporation will be
a wholly-owned subsidiary of Parent; and
WHEREAS, Munro is entering into this Agreement in order to induce Buyer
and Parent to enter into the Merger Agreement and to incur the obligations set
forth therein, which will result in substantial personal benefits to Munro, and
all of the parties hereto acknowledge that further review and mutually agreed
adjustments of the provisions hereof (other than Section 4 hereof, which will
not be subject to alteration) may hereafter take place to more fully reflect
and clarify the intent of the parties for the benefit of the parties;
NOW THEREFORE, for and in consideration of the foregoing and the mutual
promises contained herein, and upon and subject to the terms and conditions set
forth below, the parties hereto agree as follows:
SECTION 1. MERGER NOT "GOOD REASON". Munro acknowledges and agrees
that consummation of the Merger in the manner contemplated by the Merger
Agreement (a) will not, by itself, constitute a "change in Munro's title,
authority, responsibilities, duties or reporting," provided that Parent names
Munro to continue as President and Chief Executive Officer of the Surviving
Corporation pursuant to Section 1.6 of the Merger Agreement, and (b) will
result in the replacement of the outstanding stock options of the Company
with "fully equivalent substitute options," in each case as such phrase is
used in Section 2(e) of the Retention Agreement. Notwithstanding the
<PAGE>
foregoing, in consideration of Munro's covenants and agreements contained in
this Agreement, the parties agree that Munro's employment with the Surviving
Corporation shall terminate as of the Effective Time of the Merger and Munro
shall be entitled to receive all amounts and benefits (including, without
limitation, the loan forgiveness) that would have been payable to him under
the Retention Agreement as a result of the Merger and a "Termination After a
Change of Control" (as defined in the Retention Agreement), with such
consideration to be allocated to Munro's covenants contained in Sections 2, 3,
4 and 5 herein in such manner as the parties shall reasonably agree.
SECTION 2. MANAGEMENT CONSULTING SERVICES. Munro agrees for a period
not to exceed 60 days after the Effective Date of the Merger to provide,
upon and conforming to the Surviving Corporation's reasonable requests,
transitional management consulting services (on a full-time or lesser basis,
at the Surviving Corporation's California offices or from his home, as
requested) relating to the business and operations of the Surviving Corporation.
After such 60 days and during the remainder of the one year period after the
Closing Date, Munro agrees to be reasonably available to the Surviving
Corporation for telephonic transitional management consultations concerning the
business and operations of the Surviving Corporation.
SECTION 3. LITIGATION CONSULTING SERVICES. For a period of one year
after the Closing Date, Munro agrees (a) to provide truthful and complete
cooperation including, but not limited to, his appearance at interviews and/or
depositions and at litigation or arbitration hearings, in all regulatory or
litigation/arbitration matters relating to his employment, or areas of
responsibility at the Company and the Surviving Corporation, whether or not
such matters already have been commenced and through the conclusion of such
matters, and including but not limited to the matter entitled ADAMS V. WESTERN
MICRO TECHNOLOGY, INC., ET AL. and all related claims and actions arising from
the facts thereof (collectively, the "Adams Matter"), and (b) to provide
counsel to the Surviving Corporation with all documents in Munro's possession
or control relating to such regulatory or litigation/arbitration matters.
SECTION 4. INDEMNIFICATION. (a) Munro hereby agrees to indemnify,
defend and hold harmless Parent and the Surviving Corporation (the "Indemnified
Parties") against any and all losses, claims, damages, liabilities, costs,
expenses (including, without limitation, attorneys' fees and other litigation
expenses), judgments and amounts paid in settlement ("Losses") paid by the
Company or the Surviving Corporation after the date hereof in connection with
any actual or threatened claim, action, suit, proceeding or investigation
arising out of or pertaining to the Adams Matter, whether asserted or claimed
prior to, or on or after, the Effective Time; provided, however, that Munro
shall not be obligated to indemnify the Indemnified Parties for the first
$200,000 of such Losses and, provided, further, that Munro's maximum
indemnification obligation under this Section 4 shall be $500,000.
(b) Munro hereby waives (i) his right to be indemnified pursuant to
Section 4.11(a) of the Merger Agreement or under any agreement with or charter
or by-law provision of the Company or the Surviving Corporation, and (ii) his
right to coverage under the Surviving Corporation's officers' and directors'
liability insurance pursuant to Section 4.11(b) of the Merger Agreement, in
<PAGE>
each case to the extent of any Losses arising from the Adams Matter for which
Munro is agreeing to be responsible pursuant to paragraph 4(a) above.
SECTION 5. NONCOMPETITION COVENANT. Munro hereby covenants and agrees
that, for a period of five years after the Effective Date of the Merger, Munro
and his affiliates will not, directly or indirectly, own, manage, operate,
control, participate in, invest in or otherwise be connected in any manner with
(whether as an officer, director, employee, partner, investor, consultant,
lender or otherwise) any business or entity which is engaged in or is
competitive with the businesses being conducted by any of Parent, the Surviving
Corporation or their affiliates as of the date hereof.
SECTION 6. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal substantive laws of the State of
California, without regard to the conflict of laws principles thereof.
SECTION 7. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above written.
SAVOIR TECHNOLOGY GROUP, INC.
By: /s/ P. Scott Munro
--------------------------
Name: S. Munro
Title: Chairman and CEO
/s/ P. Scott Munro
-------------------------------
P. Scott Munro
TACTFUL ACQUISITION CORP.
By: /s/ David R. Birk
--------------------------
Name: David R. Birk
Title: President
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