Exhibit 99.1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Vanstar Corporation:
We have audited the accompanying consolidated balance sheets of Vanstar
Corporation as of April 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended April 30, 1998. Our audits also included the financial
statement schedule listed in Item 14(a) of this Annual Report on Form 10-K.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vanstar Corporation at April 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note 16, the accompanying consolidated financial statements
have been restated.
ERNST & YOUNG LLP
Atlanta, Georgia
June 3, 1998, except for Note 16, as to which the date is December 30, 1998.
*Pagination is the same as used in Vanstar Corporation's Annual Report on Form
10-K/A for the fiscal year ended April 30, 1998.
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Restated - Note 16)
APRIL 30,
------------------------
1998 1997
---------- --------
ASSETS
Current assets:
Cash $ 9,476 $ 5,686
Receivables, net of allowance for doubtful accounts of
$8,262 at April 30, 1998 and $8,252 at April 30, 1997 342,752 183,005
Inventories 470,474 389,592
Deferred income taxes 17,387 14,855
Prepaid expenses and other current assets 14,304 8,618
---------- --------
Total current assets 854,393 601,756
Property and equipment, net 53,303 39,240
Other assets, net 81,272 63,775
Goodwill, net of accumulated amortization of $10,113 at April 30,
1998 and $5,640 at April 30, 1997 106,796 56,652
---------- --------
$1,095,764 $761,423
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 290,187 $255,147
Accrued liabilities 63,590 34,392
Deferred revenue 21,869 24,601
Short-term borrowings 308,351 74,402
Current maturities of long-term debt 5,800 4,785
---------- --------
Total current liabilities 689,797 393,327
Long-term debt, less current maturities 2,337 5,946
Other long-term liabilities 943 661
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,739 194,518
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,489,030 shares issued and outstanding at April 30, 1998,
42,896,779 shares issued and outstanding at April 30, 1997 43 43
Additional paid-in capital 132,940 126,163
Retained earnings (since a deficit elimination of $78,448
at April 30, 1994) 74,965 40,765
---------- --------
Total stockholders' equity 207,948 166,971
---------- --------
$1,095,764 $761,423
========== ========
See accompanying notes to consolidated financial statements
27
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Restated - Note 16)
YEAR ENDED APRIL 30,
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenue:
Acquisition services $ 2,367,004 $ 1,864,909 $ 1,632,375
Other services 471,798 349,877 252,260
----------- ----------- -----------
Total revenue 2,838,802 2,214,786 1,884,635
----------- ----------- -----------
Cost of revenue:
Acquisition services 2,136,396 1,679,202 1,479,073
Other services 287,722 212,254 144,941
----------- ----------- -----------
Total cost of revenue 2,424,118 1,891,456 1,624,014
----------- ----------- -----------
Gross margin 414,684 323,330 260,621
Selling, general and administrative expenses 313,302 255,974 216,847
----------- ----------- -----------
OPERATING INCOME 101,382 67,356 43,774
Interest income 1,198 3,719 5,539
Financing expense, net (32,485) (18,082) (37,488)
----------- ----------- -----------
Income from continuing operations before income taxes
and distributions on preferred securities of Trust 70,095 52,993 11,825
Income tax provision (25,236) (19,042) (4,311)
----------- ----------- -----------
Income from continuing operations before distributions
on preferred securities of Trust 44,859 33,951 7,514
Gain on disposal of discontinued businesses
(less income taxes of $5,400) - - 9,194
Distributions on convertible preferred securities of Trust
(less income taxes of $5,013 in 1998 and $2,893 in 1997) (8,912) (5,144) -
----------- ----------- -----------
NET INCOME $ 35,947 $ 28,807 $ 16,708
=========== =========== ===========
EARNINGS PER SHARE:
Basic: Continuing operations .83 .68 .22
Discontinued operations - - .27
----------- ----------- -----------
$ .83 $ .68 $ .50
=========== =========== ===========
Diluted: Continuing operations .81 .66 .21
Discontinued operations - - .26
----------- ----------- -----------
$ .81 $ .66 $ .47
=========== =========== ===========
COMMON SHARE AND EQUIVALENTS OUTSTANDING
Basic 43,180 42,388 33,665
=========== =========== ===========
Diluted 44,388 43,977 35,503
=========== =========== ===========
See accompanying notes to consolidated financial statements
28
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
(Restated - Note 16)
COMMON STOCK,
FORMERLY RETAINED
PREFERRED STOCK COMMON STOCK A COMMON STOCK B ADDITIONAL EARNINGS
---------------- -------------- ----------------- PAID-IN (ACCUM.
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ------ ------ ------ ------ ------ ----------- --------- ---------
BALANCE AT APRIL 30, 1995 15,309 $ 153 8,575 $ 9 3,708 $ 4 $ 25,087 $ (3,135) $ 22,118
Redemption of Class A Common Stock - - (103) - - - - - -
Issuance of warrants - - - - - - 500 - 500
Conversion of Class F Preferred
Stock and Senior Preferred Stock
to Class A Common Stock (15,309) (153) 15,309 15 - - 138 - -
Conversion of Class B Common
Stock to Class A Common Stock - - 3,708 4 (3,708) (4) - - -
Conversion of warrants to Class
A Common Stock - - 4,996 5 - - (5) - -
Issuance of Class A Common Stock - - 9,216 9 - - 83,382 - 83,391
Accrued dividends forgiven-Senior
Preferred Stock - - - - - - 6,162 - 6,162
Exercise of stock options - - 26 - - - 152 - 152
Net income - - - - - - - 16,708 16,708
Dividends on preferred stock - - - - - - - (2,988) (2,988)
------- ------ ------- --- ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1996 - - 41,727 42 - - 115,416 10,585 126,043
Issuance of Common Stock:
Employee stock purchase plan - - 389 - - - 3,898 - 3,898
Exercise of stock options,
including income tax benefit - - 597 1 - - 6,772 - 6,772
Other - - 184 - - - 77 - 77
Unrealized holding gain on
available-for-sale securities - - - - - - - 1,373 1,373
Net income - - - - - - - 28,807 28,807
------- ------ ------- --- ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1997 - - 42,897 43 - - 126,163 40,765 166,971
Issuance of Common Stock:
Employee stock purchase plan - - 407 - - - 4,767 - 4,767
Exercise of stock options,
including income tax benefit - - 236 - - - 2,010 - 2,010
Business acquisitions and other - - (51) - - - -
Accumulated translation adjustment - - - - - - - (167) (167)
Unrealized holding loss on
available-for-sale securities - - - - - - - (1,580) (1,580)
Net income - - - - - - - 35,947 35,947
------- ------ ------- --- ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1998 - $ - 43,489 $43 - $ - $ 132,940 $ 74,965 $ 207,948
======= ====== ======= === ====== ====== ========= ======== =========
See accompanying notes to consolidated financial statements
29
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Restated - Note 16)
YEAR ENDED APRIL 30,
----------------------------------------
1998 1997 1996
--------- --------- --------
Cash Flows from Operating Activities:
Net income $ 35,947 $ 28,807 $ 16,523
Adjustments:
Depreciation and amortization 27,129 17,739 10,621
Deferred income taxes (4,858) 16,149 10,029
Provision for doubtful accounts 1,300 (2,705) 14,500
Noncash interest expense 244 - -
Gain on disposal of discontinued businesses - - (14,594)
Changes in operating assets and liabilities:
Receivables (144,758) 157,874 (52,941)
Inventories (68,174) (33,624) (52,919)
Prepaid expenses and other current assets (8,812) (6,170) (2,254)
Accounts payable (2,205) (56,499) 42,920
Accrued and other liabilities 12,726 (23,781) 5,311
--------- --------- --------
Total adjustments (187,408) 68,983 (39,327)
--------- --------- --------
Net cash (used in) provided by operating activities (151,461) 97,790 (22,804)
Cash Flows from Investing Activities:
Capital expenditures (40,372) (25,224) (22,077)
Proceeds from sale of building - 3,125 -
Purchase of businesses, net of cash acquired (34,161) (36,726) (1,435)
Sales of businesses - - 14,594
Investment in available-for-sale securities - (10,073) -
--------- --------- --------
Net cash used in investing activities (74,533) (68,898) (8,918)
Cash Flows from Financing Activities:
Payments on long-term debt (10,121) (25,262) (8,536)
Borrowings (repayments) under line of credit, net 233,949 (214,670) (36,706)
Proceeds from issuance of convertible preferred
securities of Trust, net - 194,320 -
Issuance of common stock 5,956 6,901 84,044
--------- --------- --------
Net cash provided by (used in) financing activities 229,784 (38,711) 38,802
--------- --------- --------
Net increase (decrease) in cash 3,790 (9,819) 7,080
Cash at beginning of the period 5,686 15,505 8,425
--------- --------- --------
Cash at end of the period $ 9,476 $ 5,686 $ 15,505
========= ========= ========
30
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(In thousands)
(Restated - Note 16)
YEAR ENDED APRIL 30,
-------------------------------------
1998 1997 1996
-------- -------- -------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 18,636 $ 18,096 $40,540
Discounts and net expenses on receivables securitization 12,086 3,275 -
Distributions on preferred securities of Trust 13,584 6,943 -
Income taxes, net of refunds 5,144 3,386 625
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital leases $ 3,040 $ 8,416 $ 4,341
Dataflex Regions purchase:
Fair value of assets acquired $ 46,889
Cash paid, net of cash received (36,726)
--------
Liabilities assumed $ 10,163
========
Sysorex purchase:
Fair value of assets acquired $ 85,448
Cash paid, net of cash received (32,486)
--------
Liabilities assumed $ 52,962
========
See accompanying notes to consolidated financial statements
31
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Vanstar Corporation (the "Company") is a leading provider of services
and products designed to build, manage and enhance PC network infrastructures
for Fortune 1000 companies and other large enterprises. The Company provides
customized information technology and networking solutions for its customers by
integrating value-added professional services with its expertise in sourcing,
distributing and supporting PC hardware, network products, computer peripherals
and software from many vendors. The consolidated financial statements include
the accounts of Vanstar Corporation and its consolidated subsidiaries. All
significant intercompany balances have been eliminated. Certain prior period
amounts have been reclassified to conform to current period presentation. Use of
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Acquisition services revenue is primarily derived from the sale of
computer hardware, software, peripherals and communications devices manufactured
by third parties and sold by the Company, principally to implement integration
projects. Other services revenue is derived from value-added services, including
services focused on the server and communication segments of the PC network
infrastructure and services performed for the desktop. Product sales are
recognized at the time of shipment. Revenue from services is recognized as
services are performed or ratably if performed over a service contract period.
Deferred revenue primarily represents unrecognized service revenue.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate their respective fair values due to the short-term maturity of these
instruments. The carrying value for amounts outstanding under the Company's
Financing Program Agreement with IBM Credit Corporation ("IBMCC") approximates
fair value since those amounts bear interest at current market rates. Long-term
debt consists of variable-rate instruments at terms the Company believes would
be available if similar financing were obtained from another party. As such,
carrying amounts also approximate their fair value. The carrying value of the
Preferred Securities approximates their fair value based upon quoted market
prices.
Inventories
Inventory for resale and spare parts inventory are stated at the lower of
cost (first-in, first-out method) or market. Periodically, the Company assesses
the appropriateness of the inventory valuations giving consideration to
obsolete, slow-moving and nonsalable inventory.
In order to adequately service its customers, the Company is required to
maintain quantities of consumable and repairable parts ("spare parts") for
extended periods of time. Based on historical experience, the Company determines
an allocation of the spare parts to both current inventories and other long-term
assets.
32
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Goodwill
Goodwill represents the excess of cost over the net assets of acquired
businesses and is amortized using the straight-line method over twenty to
twenty-five years. Amortization expense on goodwill was $4.5 million, $2.2
million, and $1.7 million for the fiscal years ended April 30, 1998, 1997, and
1996, respectively. The Company periodically assesses the appropriateness of the
carrying amount of goodwill and the amortization periods based on the
undiscounted value of the current and anticipated future cash flows and
projected profitability of the acquired businesses. If there are indicated
impairments, a write down is recorded to the extent the carrying amount exceeds
the fair value in accordance with Accounting Principles Board ("APB") Opinion
No. 17, Intangible Assets.
Marketing Development Funds
Primary vendors of the Company provide various incentives, in the form of
cash or credit against obligations, for certain training and for promoting and
marketing their products. The funds or credits received are based on the
purchases or sales of the vendors' products and are earned through performance
of specific marketing programs or upon the attainment of certain objectives
outlined by the vendors. Funds or credits earned are recorded as a reduction of
either cost of revenue or selling, general and administrative expenses, based on
the objectives of the program established by the vendors. Funds or credits from
the Company's primary vendors typically range from 1% to 5% of sales or
purchases of vendor products.
Earnings Per Share
Effective during the year ended April 30, 1998, the Company adopted
Financial Accounting Standards Board ("FASB") Statement No. 128, Earnings per
Share ("Statement 128"). Under Statement 128, Basic earnings per share are
computed using the weighted average number of shares of Common Stock during the
period and Diluted earnings per share are computed using the weighted average
number of shares of Common Stock and dilutive Common Stock equivalents
outstanding during the period. Common Stock equivalents are computed for the
Company's outstanding options using the treasury stock method. The Company
restated prior periods to reflect the change in method required by Statement
128. Earnings per share for the fiscal year ended April 30, 1996 are presented
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock and the exchange of all outstanding warrants for shares of
Common Stock in connection with the Company's initial public offering on March
11, 1996 as if the conversion had occurred at the later of the beginning of
fiscal year 1996 or the issuance date of the respective security.
Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase
plans in accordance with APB Opinion No. 25, Accounting For Stock Issued to
Employees ("APB 25"); accordingly, no compensation expense has been recognized.
Under APB 25, because the exercise price of the Company's stock options equals
the market value of the underlying stock on the date of the grant, no
compensation expense is recognized. Because the employee stock purchase plan is
considered a noncompensatory plan under APB 25, no compensation expense is
recognized. The Company has adopted the disclosure only provisions of FASB
Statement No. 123, Accounting For Stock-Based Compensation ("Statement 123").
Note 13 to the consolidated financial statements contains a summary of the pro
forma effects to reported net income and net income per share for the years
ended April 30, 1998, 1997 and 1996 as if the Company had elected to recognize
compensation cost based on the fair value of the options granted as prescribed
by Statement 123.
33
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
New Accounting Pronouncements
The Financial Accounting Standards Board recently issued two standards
which will be applicable to the Company but which the Company is not yet
required to adopt, FASB Statement No. 130, Reporting Comprehensive Income, and
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. The adoption of these statements will not impact the Company's
financial position or results of operations but may change the presentation of
certain items in the Company's financial statements and related disclosures.
2. ACQUISITIONS
On May 24, 1996, the Company, through a wholly-owned subsidiary, acquired
certain of the assets and assumed certain of the liabilities of Dataflex
Corporation and of Dataflex's wholly-owned subsidiary, Dataflex Southwest
Corporation. The assets acquired and liabilities assumed comprise substantially
all of the assets and business operations previously associated with the
business operations of Dataflex known as the Dataflex Western Region and
Dataflex Southwest Region (the "Dataflex Regions"). The Dataflex Regions offered
PC product distribution, service and support in the states of Arizona,
California, Colorado, Nevada, New Mexico, and Utah and reported revenues of
approximately $145 million for the fiscal year ended March 31, 1996. The
purchase price of the Dataflex Regions, was $37.7 million.
On September 4, 1996, the Company acquired Mentor Technologies, Ltd., an
Ohio limited partnership ("Mentor Technologies") providing training and
education services throughout the upper mid-western United States. A total of
300,000 shares of Common Stock (having an aggregate value on the closing date of
approximately $6.0 million) were issued in connection with the acquisition. For
the calendar year ended December 31, 1995, Mentor Technologies reported revenues
of approximately $5.5 million. For the period from May 1, 1996 to September 4,
1996, Mentor Technologies had revenue and net income of $1,677,000 and $97,000,
respectively.
On December 16, 1996, the Company acquired Contract Data Services, Inc., a
North Carolina corporation ("CDS"), in exchange for 904,866 shares of the Common
Stock (having an aggregate value on the closing date of approximately $20.8
million). CDS provided outsourcing of integrated information technology
services, related technical support services and procurement of computer
hardware and software. For the fiscal year ended March 31, 1996, CDS reported
total revenues of approximately $74.3 million. For the period from May 1, 1996
to December 16, 1996, CDS had revenue and net loss of $34,543,000 and
$1,284,000, respectively.
On January 9, 1997, the Company acquired inventory and equipment from DCT
Systems, Inc., a Minnesota corporation, Niloy, Inc., a Georgia corporation, and
NCT Systems, Inc., an Illinois corporation (collectively, "DCT"). The Company
purchased specified assets for $4.0 million. In addition, the asset purchase
agreement provided that DCT could receive a maximum of 180,000 shares of the
Common Stock upon the satisfaction of certain conditions. In February 1998,
120,000 of those shares were released to DCT. The Company also entered into a
servicing and marketing agreement on January 9, 1997 whereby the Company will
provide certain computer products and billing services to DCT. Based upon
certain criteria under the servicing and marketing agreement, DCT also may
receive, at DCT's election, cash or up to 40,000 additional restricted shares of
the Common Stock.
On July 7, 1997, the Company acquired certain assets and assumed certain
liabilities of Sysorex Information Systems, Inc. ("Sysorex"), a government
technology provider. The purchase price was approximately $54.5 million and a
contingent payment of 500,000 shares of Common Stock based on the future
financial performance of the acquired business.
34
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The acquisitions of the Dataflex Regions, DCT and Sysorex were accounted
for as purchases and the excess of the cost over the fair value of net assets
acquired for each acquisition is being amortized on a straight line basis
ranging from 20 to 25 years. The operations of these acquisitions are included
in the consolidated statements of income from the respective dates of
acquisition. The following unaudited pro forma summary presents the consolidated
results of operations for the Sysorex acquisition as if it had occurred on May
1, 1996 and for the Dataflex Regions as if it had occurred on May 1, 1995.
Fiscal 1997 Fiscal 1996
---------------- ---------------
Revenues $ 2,324,558 $ 2,031,035
Net Income 26,991 16,498
Basic EPS 0.64 0.49
Diluted EPS 0.61 0.46
The acquisitions of Mentor Technologies and CDS were accounted for as
pooling-of-interests business combinations. The consolidated balance sheets,
statements of income, cash flows, and stockholders' equity were restated to
reflect these acquisitions. In connection with these combinations, no
adjustments of net assets were required to conform the accounting practices of
either Mentor Technologies or CDS to those of the Company. The accounting
treatment of the pooling-of-interest transactions are further discussed in Note
16.
3. DISCONTINUED OPERATIONS
On January 31, 1994, the Company sold certain assets and liabilities of
its U.S. franchise business, including all domestic franchise agreements, Datago
distribution agreements and the right to the "ComputerLand" name and trademark
within the United States to Merisel Franchise Aggregation Business ("Merisel
FAB"), a wholly-owned subsidiary of Merisel, Inc. ("Merisel"). Concurrent with
the sale, the Company entered into a distribution services agreement with
Merisel FAB. Pursuant to that agreement, the Company continued to supply product
and provide certain logistics and other support services to Merisel FAB and
received a monthly distribution fee for such services. The Company also granted
Merisel FAB $20.0 million in extended, interest-bearing credit on its product
purchases.
Effective January 31, 1996, the Company and Merisel FAB signed amendments
to the asset purchase agreement and distribution services agreement. The
amendments provided for: the term of the distribution services agreement to be
extended through April 30, 1997; the distribution fee to be reduced retroactive
to April 1, 1995; the additional consideration to be fixed at $14.6 million; the
maximum amount of the extended credit to be increased by $11.1 million, which
would be reduced in monthly installments from February 1996 through July 1997;
and the original amount of interest-bearing credit of $20.0 million to be
extended and reduced in three equal monthly installments from May 15, 1997
through July 15, 1997. The Company recorded a gain of $9.2 million, net of
applicable taxes, for the year ended April 30, 1996 as a result of the
additional consideration. As a result of announcements made by Merisel on
February 20, 1996, the Company decided to record a $31.1 million provision as of
January 31, 1996 against its extended credit due from Merisel FAB. On May 29,
1996, the Company entered into an agreement with a third party under which the
Company received $15.6 million in cash in exchange for providing the third party
the right to receive payments in May, June and July 1997 totaling $20.0 million
out of amounts collected from the extended credit owed to the Company by Merisel
FAB. As a result, the Company adjusted a portion of the reserve on its extended
credit from Merisel FAB resulting in additional pre-tax income of $15.6 million
during the quarter ended April 30, 1996.
On March 28, 1997, the distribution and services agreement was assigned
from Merisel FAB to ComputerLand Corporation, a wholly owned subsidiary of
Synnex Information Technologies, Inc., as a result of
35
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
the sale by Merisel of substantially all of the assets of Merisel FAB to
ComputerLand Corporation. The Company completed its obligation under that
agreement in January 1998.
4. INVENTORIES
The composition of inventories at April 30, 1998 and 1997 is as follows (in
thousands):
1998 1997
-------- --------
Inventory for resale $462,110 $386,664
Less reserve for obsolete inventory 10,135 12,586
-------- --------
451,975 374,078
Spare parts (current) 18,499 15,514
-------- --------
$470,474 $389,592
======== ========
5. PROPERTY AND EQUIPMENT, NET
The composition of property and equipment at April 30, 1998 and 1997 was as
follows (in thousands):
1998 1997
-------- --------
Furniture and equipment $ 80,995 $ 84,751
Leasehold improvements 26,235 22,440
-------- --------
107,230 107,191
Less accumulated depreciation and amortization 53,927 67,951
-------- --------
$ 53,303 $ 39,240
======== ========
The carrying value of property and equipment was adjusted to fair value on
April 30, 1994 in connection with the Company's quasi-reorganization. Additions
since April 30, 1994 have been recorded at cost. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of
the related assets--3 to 5 years for furniture and equipment and the lesser of
the lease term or the useful life for leasehold improvements. Depreciation
expense associated with property and equipment was $19.4 million, $14.4 million
and $7.7 million for the fiscal years ended April 30, 1998, 1997 and 1996,
respectively. During the year ended April 30, 1998 the Company wrote-off
approximately $32 million of fully depreciated property and equipment.
6. OTHER ASSETS, NET
The composition of other assets at April 30, 1998 and 1997 was as follows
(in thousands):
1998 1997
------- -------
Spare parts (non-current) $40,497 $31,541
Capitalized software, net 24,098 17,551
Available-for-sale security 8,256 10,719
Deferred income taxes (non-current) 3,213 -
Other 5,208 3,964
------- -------
$81,272 $63,775
======= =======
Capitalized software represents the costs associated with development of
software for the Company's internal use. Such costs are capitalized in
accordance with American Institute of Certified Public Accountants Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and are amortized over the remaining useful economic
life of the software of up to five years. Accumulated
36
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
amortization at April 30, 1998 and 1997 was $5.3 million and $2.0 million,
respectively. Amortization expense associated with capitalized software was $2.9
million, $0.5 million and $0.3 million for the fiscal years ended April 30,
1998, 1997 and 1996, respectively.
In December 1996, the Company purchased 7.5% of the common stock of
ComputerLand Poland S.A., a publicly traded foreign company, for $8.6 million.
The investment is classified as an "available-for sale" security in accordance
with FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At April 30, 1998 the fair market value of the investment was
$8.3 million and the gross unrealized holding loss was $.3 million. At April 30,
1998, the net unrealized holding loss of $.2 million (net of taxes of $0.1
million) was included as a reduction to retained earnings. At April 30, 1997,
the net unrealized holding gain of $1.4 million (net of taxes of $.8 million)
was included as an increase to retained earnings. On April 30, 1997, the Company
purchased additional restricted common stock of ComputerLand Poland S.A. for
$1.5 million. At April 30, 1998, the Company owns approximately 8.3% of the
common stock of ComputerLand Poland S.A. 7. DEBT
Outstanding debt at April 30, 1998 and 1997 was as follows (in thousands):
1998 1997
-------- -------
Line of credit $308,351 $74,402
Obligations under capital leases 7,479 9,838
Other 658 893
-------- -------
Total outstanding debt 316,488 85,133
Less current maturities 314,151 79,187
-------- -------
Long-term debt $ 2,337 $ 5,946
======== =======
The Company's line of credit represents amounts borrowed pursuant to the
Financing Program Agreement with IBMCC, an affiliate of one of the Company's
principal vendors. At April 30, 1998, the line of credit had an aggregate limit
of $550 million. On July 1, 1998, the available line of credit is scheduled to
be reduced to $500 million. The line of credit is secured by portions of the
Company's inventory, accounts receivable and certain other assets. The Financing
Program Agreement is renewable every 12 months, and is terminable by the Company
or IBMCC at any time upon 90 days written notice. In the event of such
termination, the outstanding borrowings are not due and payable to IBMCC until
the end of the term of the Financing Program Agreement, currently October 31,
1998. The terms of the Financing Program Agreement include financial covenants
requiring the Company to maintain compliance with certain financial ratios, and
also limit the Company's ability to pay cash dividends on its Common Stock. As
of April 30, 1998, the Company had complied with or obtained a waiver for any
noncompliance with those financial covenants. At April 30, 1998, amounts
outstanding under the line of credit totaled $465.8 million, of which $157.4
million and $308.4 million were classified as accounts payable and short-term
borrowings, respectively. Amounts outstanding and classified as short-term
borrowings bear interest at LIBOR plus 1.6%, which was 7.3% at April 30, 1998.
Amounts outstanding and classified as short-term borrowings in 1997 bear
interest at the Prime Rate minus .8%, which was 7.7% at April 30, 1997.
Aggregate maturities of long-term debt, excluding the line of credit, are
approximately $5.8 million, $2.0 million, $0.2 million, and $0.1 million,
respectively for each of the succeeding four years.
8. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established the Securitization
Facility, which currently provides the Company with up to $200 million in
available credit. In connection with the Securitization Facility, the Company
sells on a revolving basis, certain Pooled Receivables to the special purpose
corporation which in turn sells a percentage ownership 37
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
interest in the Pooled Receivables to a commercial paper conduit sponsored by a
financial institution. These transactions have been recorded as a sale in
accordance with FASB Statement No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. The amount of the Pooled
Receivables, which totaled $335.2 million at April 30, 1998, is reflected as a
reduction of receivables. The Company retains an interest in certain of the
assets sold. At April 30, 1998, the amount of that retained interest totaled
$160.6 million and is included in receivables. The Company is retained as
servicer of the Pooled Receivables. Although management believes that the
servicing revenues earned will be adequate compensation for performing the
services, estimating the fair value of the servicing asset was not considered
practicable. Consequently, a servicing asset has not been recognized. The gross
proceeds resulting from the sale of the percentage ownership interests in the
Pooled Receivables totaled $200 million as of April 30, 1998. Such proceeds are
included in cash flows from operating activities in the consolidated statements
of cash flows. Discounts and net expenses associated with the sales of the
receivables totaling $12.1 and $3.4 million are included in financing expenses,
net on the consolidated statements of income for the years ended April 30, 1998
and 1997, respectively.
9. CONVERTIBLE PREFERRED SECURITIES OF TRUST
During October 1996, the Trust, of which the Company owns all of the
common trust securities, issued 4,025,000 Preferred Securities. The Preferred
Securities have a liquidation value of $50 per security and are convertible at
any time at the option of the holder into shares of Common Stock at a conversion
rate of 1.739 shares for each Preferred Security, subject to adjustment in
certain circumstances. Distributions on Preferred Securities accrue at an annual
rate of 6 3/4% of the liquidation value of $50 per Preferred Security and are
included in "Distributions on convertible preferred securities of Trust, less
income taxes" in the consolidated statements of income. The proceeds of the
private placement, which totaled $194.4 million (net of initial purchasers'
discounts and estimated offering expenses totaling $6.9 million) are included in
"Company-obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible subordinated debt securities of the
Company" on the consolidated balance sheets. The Company has entered into
several contractual arrangements (the "Back-up Undertakings") for the purpose of
fully and unconditionally supporting the Trust's payment of distributions,
redemption payments and liquidation payments with respect to the Preferred
Securities. Considered together, the Back-up Undertakings constitute a full and
unconditional guarantee by the Company of the Trust's obligations on the
Preferred Securities.
The Trust invested the proceeds of the offering in the Debentures issued
by the Company. The Debentures bear interest at 6 3/4% per annum, generally
payable quarterly on January 1, April 1, July 1 and October 1. The Debentures
are redeemable by the Company, in whole or in part, on or after October 5, 1999
at designated redemption prices. If the Company redeems the Debentures, the
Trust must redeem the Preferred Securities on a pro rata basis having an
aggregate liquidation value equal to the aggregate principal amount of the
Debentures redeemed. The sole assets of the Trust are the Debentures, which have
an aggregate principal amount of $207.5 million. The Debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements.
10. CONCENTRATION OF CREDIT RISK
The Company purchases and sells multi-vendor PC products and provides
various PC-related services to end-users. Although receivables from end-users
are uncollateralized, the credit risk is limited due to the large number and
diversity of customers comprising the Company's customer base. No single
customer accounted for more than 10% of the Company's revenue during fiscal year
1998 and 1997. During fiscal year 1996, no customer other than Microsoft
accounted for more than 10% of the Company's total revenues. Revenues from
Microsoft represented 12.0% of the Company's total revenues for fiscal year
1996.
38
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
11. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has entered into an agreement with one of its vendors that
requires it to purchase a minimum of $55 million of computer software over a
five-year period. At April 30, 1998, the remaining purchase commitment pursuant
to that agreement was $43 million. Leases
The Company leases certain administrative, warehousing and other
facilities under operating leases, and equipment under a combination of
operating and capital leases. Most of the Company's facility operating leases
are subject to annual escalation clauses ranging from two to five percent.
Several facilities under operating leases have been sublet.
The future minimum lease payments on noncancelable operating leases with
an initial term in excess of one year and future sublease income under
noncancelable subleases as of April 30, 1998 are as follows (in thousands):
Minimum Minimum
Lease Sublease
Payments Income
------------- ---------------
Year Ending April 30,
1999 $ 16,737 $ 255
2000 12,415 149
2001 9,419 91
2002 7,427 -
2003 6,100 -
Thereafter 18,649 -
------------- ---------------
$ 70,747 $ 495
============= ===============
In connection with leases on facilities associated with acquisitions,
the Company established reserves for future lease payments on certain duplicate
or excess facilities. The balance of these reserves at April 30, 1998 was
approximately $1.7 million, which has not reduced the amounts shown above.
Rental expense, under operating leases, charged to operations was $23.5
million, $19.5 million and $14.8 million during fiscal years ended April 30,
1998, 1997 and 1996, respectively.
The cost of assets recorded under capital leases was $15.0 million and
$12.7 million at April 30, 1998 and 1997, respectively. Accumulated amortization
on such assets was $8.1 million and $3.3 million at April 30, 1998 and 1997,
respectively. The present value of minimum lease payments under capital leases
as of April 30, 1998 was $7.5 million. Legal Proceedings
On July 3, 1997, a trust claiming to have purchased shares of the
Common Stock filed suit in Superior Court of the State of California. The suit
is entitled David T. O'Neal Trust, Dated 4/1/77, v. Vanstar Corporation, et al.,
Consolidated Case No. CV767266. On January 21, 1998, the same plaintiff, along
with another plaintiff claiming to have purchased shares of Common Stock, filed
suit in the United States District Court for the Northern District of
California, making allegations virtually identical to those in the earlier suit.
The recent suit is captioned David T. O'Neal Trust, Dated 4/1/77, et al. v.
Vanstar Corporation, et al., Case No. C-98-0216 MJJ. Both suits name as
defendants the Company, certain directors and officers of the Company, and the
Company's principal stockholder, Warburg Pincus Capital Co., L.P., and certain
of its
39
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
affiliates. The complaints in both suits generally allege, among other things,
that the defendants made false or misleading statements or concealed information
regarding the Company and that the plaintiffs, as holders of the Common Stock,
suffered damage as a result.
The plaintiffs in both suits seek class action status, purporting to
represent a class of purchasers of Common Stock between March 11, 1996 and March
14, 1997, and seek damages in an unspecified amount, together with other relief.
The complaint in the first suit purports to state a cause of action under
California law; the complaint in the recent suit purports to state two causes of
action under the Securities Exchange Act of 1934. On January 28, 1998, the
California Superior Court dismissed the plaintiffs' complaint in the first suit
but granted the plaintiffs leave to amend to cure the deficiencies in their
complaint. The plaintiffs have amended the complaint, but the court has not yet
ruled on the sufficiency of that amended complaint. The Company believes that
the plaintiffs' allegations in both suits are without merit and intends to
defend the suits vigorously.
Various legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of these actions will not have a material
adverse effect on the Company's financial position or results of operations,
taken as a whole.
12. STOCKHOLDERS' EQUITY
Initial Public Offering
On March 11, 1996, the Company completed an initial public offering selling
9,215,770 shares of its Common Stock for approximately $83.4 million, net of
issuance costs.
Preferred Stock, Common Stock and Warrants
Concurrent with the consummation of the initial public offering, all
outstanding shares of Senior Preferred Stock, Class F Preferred Stock and Class
B Common Stock were converted into 19,018,088 shares of Common Stock.
Additionally, all outstanding warrants were exchanged for 4,995,691 shares of
Common Stock, all accrued dividends payable to the holder of the Senior
Preferred Stock totaling $6.2 million were forgiven and all such stock and
warrants converted to Common Stock were canceled.
As of April 30, 1998, the Company had 15,000,000 shares of undesignated
Preferred Stock, $0.01 par value, authorized. No shares have been issued.
At April 30, 1998, the Company had 7,300,640 shares of Common Stock
reserved for future issuance in connection with the Company's stock option and
stock purchase plans.
13. EMPLOYEE BENEFIT PLANS
The Company has elected to follow APB 25 and related interpretations, in
accounting for employee stock options issued to certain of the Company's
employees. Under APB 25, because the exercise price of the Company's stock
options equals the market value of the underlying stock on the date of the
grant, no compensation expense is recognized.
Stock Option Plans
The Company has three stock option plans which provide for the issuance of
incentive stock options ("ISOs"), stock options that are non-qualified for
Federal income tax purposes ("NQSOs") and stock appreciation rights ("SARs").
The 1988 Stock Option Plan was adopted in July 1988 and provides for the
issuance of ISOs, NQSOs and SARs to key employees and directors. The 1993 Stock
Option/Stock Issuance Plan was adopted in April 1993 and provides for the
issuance of shares of Common Stock, ISOs, NQSOs and SARs to highly
40
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
compensated, managerial employees, officers and directors. The 1996 Stock
Option/Stock Issuance Plan was adopted in August 1996 and provides for the
issuance of shares of Common Stock, ISOs, NQSOs and SARs to officers, directors
and employees of, and consultants to, the Company. The exercise price of the
ISOs under all plans may not be less than 100% of the fair market value of the
Common Stock at the time of grant. Under the 1993 plan, the exercise price of
the NQSOs may not be less than 85% of the fair market value at the time of
grant. At April 30, 1998, the total number of shares of Common Stock for which
options may be granted pursuant to the 1988, 1993, and 1996 plans were 2.3
million, 2.4 million and 3.3 million, respectively. Under all plans, options
generally become exercisable ratably over a four or five year period and expire
in ten years. At April 30, 1998, no SARs had been issued.
A summary of the Company's stock option activity, and related information
for the fiscal years ended April 30, 1998, 1997 and 1996 is as follows (in
thousands, except for weighted-average exercise prices):
Weighted Average
Number of Exercise
Options Price
----------- ----------
Balance at April 30, 1995 2,161 $ 5.71
Granted 2,967 4.35
Exercised (26) 5.83
Canceled (1,285) 5.80
---------
Balance at April 30, 1996 3,817 $ 4.62
Granted 1,557 14.22
Exercised (597) 4.87
Canceled (307) 6.07
---------
Balance at April 30, 1997 4,470 $ 7.83
Granted 1,763 10.03
Exercised (236) 5.21
Canceled (768) 8.45
---------
Balance at April 30, 1998 5,229 $ 8.60
=========
Exercisable at April 30, 1998 2,408 $ 7.66
=========
Shares Available for Grant at April 30, 1998 1,868
=========
The following table summarizes information about the Company's stock
options outstanding and exercisable by price range at April 30, 1998 (options in
thousands):
Exercise Price Ranges Total
--------------------------------------------- -----------
$0.18-$5.55 $ 6.00-$10.00 $10.13-$23.87 $0.18-23.87
----------- ------------- ------------- -----------
Number outstanding at April 30, 1998 1,906 1,661 1,662 5,229
Weighted-average remaining
contractual life 5.90 years 8.55 years 8.91 years 7.70 years
Weighted-average exercise price
for options outstanding $3.58 $9.15 $13.82 $8.60
Number exercisable at April 30, 1998 1,249 590 569 2,408
Weighted-average exercise price
for options exercisable $3.88 $9.25 $14.29 $7.66
41
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Stock Purchase Plan
The Company provides an employee stock purchase plan (the "Stock Purchase
Plan") allowing eligible employees to purchase shares of the Common Stock. The
Stock Purchase Plan is intended to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code").
The total number of shares of Common Stock authorized for issuance under the
plan is 1,000,000. All full-time employees of the Company are eligible to
participate, subject to certain limited exceptions. The Stock Purchase Plan
provides a means for the Company's employees to purchase stock through payroll
deductions of up to 10% of their gross compensation. The purchase price for
shares offered under the Stock Purchase Plan is equal to 85% of the lower of the
closing price of the Common Stock on the first or last day of the six month
offer period. During fiscal year 1998 and 1997, the Company sold 406,827 and
389,245 shares, respectively of Common Stock under the Stock Purchase Plan to
its employees. Pro Forma Information
Pro forma disclosure information regarding net income and earnings per
share is required by Statement 123, and has been determined as if the Company
had accounted for its stock options and the Stock Purchase Plan under the fair
value method of that Statement.
For purposes of pro forma disclosures only, the estimated fair value of
the options is amortized to expense over the options' vesting period. The fair
value for all options was estimated at the date of grant using the Black-Scholes
multiple option pricing model with the following assumptions:
1998 1997 1996
----------- ----------- -----------
Expected volatility 69% 71% 71%
Risk-free interest rate 5.8% 6.2% 6.0%
Expected life of options 2.0 years 2.0 years 2.0 years
Expected dividend yield 0.0% 0.0% 0.0%
The weighted-average fair value per share of options granted during the
years ended April 30, 1998, 1997 and 1996 was $10.03, $8.09 and $2.55,
respectively. Pro forma net income reflects only options granted in fiscal year
1998, 1997 and 1996. Therefore, the impact of calculating compensation cost for
stock options will not be fully reflected in the pro forma net income and pro
forma earnings per share amounts until fiscal year 2000.
For purposes of pro forma disclosures only, compensation cost associated
with the Stock Purchase Plan is estimated for the fair value of the employees'
purchase rights using the Black-Scholes model with the following assumptions
1998 1997 1996
----------- ----------- -----------
Expected volatility 61% 58% 72%
Risk-free interest rate 5.4% 5.3% 5.4%
Expected life of options .5 years .5 years .5 years
Expected dividend yield 0.0% 0.0% 0.0%
The weighted-average fair value per share of those purchase rights granted
in fiscal year 1998, 1997 and 1996 was $2.75, $2.94 and $2.12, respectively.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee
42
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
stock options have characteristics significantly different from those of traded
options, and because changes in the assumptions can materially affect the fair
value estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Pro forma net income, earnings per share and compensation expense are
as follows (in thousands, except per share data):
YEAR ENDED APRIL 30,
-------------------------------------------
1998 1997 1996
------------ ------------ -----------
Net income As reported $ 35,947 $ 28,807 $ 16,708
Pro forma 29,578 22,739 14,580
Basic earnings per share As reported .83 .68 .50
Pro forma .70 .54 .45
Diluted earnings per share As reported .81 .66 .47
Pro forma .68 .53 .42
Compensation expense Pro forma 8,937 8,555 3,221
401(k) Plan
The Company provides a savings plan under section 401(k) of the Code to
substantially all domestic employees who are over the age of 21. Employees can
contribute up to 12% of their annual salary to the plan up to the maximum
allowed by the Code. Prior to August 1, 1996, the Company matched 100% of
certain eligible employee contributions up to $200 not to exceed the maximum of
1% of the employee's eligible compensation. If the employee contributed more
than $200 to the plan, the Company contributed an amount equal to the greater of
$200 or 25% of the employee's contribution up to a maximum of 1% of the
employee's eligible compensation. Effective August 1, 1996, the Company changed
its matching policy to 50% on the first 4% of eligible compensation contributed
by an eligible employee up to a maximum of 2% of the employee's eligible
compensation. The amount charged to expense for the matching contribution was
$2.1 million, $1.3 million and $0.7 million, for the fiscal years ended April
30, 1998, 1997 and 1996, respectively.
14. INCOME TAXES
The income tax provision for the years ended April 30, 1998, 1997 and 1996
computed under FASB Statement No. 109, Accounting for Income Taxes, consists of
the following (in thousands):
1998 1997 1996
-------- -------- --------
Current:
Federal $ 21,371 $ (100) $ (418)
State 3,710 100 100
-------- -------- --------
25,081 - (318)
-------- -------- --------
Deferred
Federal (4,698) 14,319 8,561
State (160) 1,830 1,468
-------- -------- --------
(4,858) 16,149 10,029
-------- -------- --------
Total provision for income taxes $ 20,223 $ 16,149 $ 9,711
======== ======== ========
43
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The income tax provision for the years ended April 30, 1998, 1997 and
1996 is allocated between discontinued and continuing operations as follows (in
thousands):
1998 1997 1996
-------- -------- ------
Provision on income before distribution on
preferred securities of Trust $ 25,236 $ 19,042 $4,311
Tax benefit allocable to distribution on preferred
securities of Trust (5,013) (2,893) -
-------- -------- ------
Net provision allocated to continuing operations 20,223 16,149 4,311
Provision allocated to operations of discontinued
Businesses and income on disposal of
discontinued businesses - - 5,400
-------- -------- ------
Total provision for income taxes $ 20,223 $ 16,149 $9,711
======== ======== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. Significant components of deferred
tax assets at April 30, 1998 and 1997 consist of the following (in thousands):
1998 1997
------- -------
Net operating loss carryforwards $ - $ 1,490
Reserves 11,837 8,237
Inventory 4,554 5,128
State income taxes 1,567 -
Alternative minimum tax credits 2,163 -
Other expenses, not currently deductible 479 -
------- -------
Total net deferred tax assets $20,600 $14,855
======= =======
The full realization of the $20.6 million of deferred tax assets
carried at April 30, 1998 is dependent upon the Company achieving sufficient
future pretax earnings. Although realization is not assured, management believes
that sufficient taxable income will be generated through operations to realize
the net deferred tax assets.
A reconciliation for the years ended April 30, 1998, 1997 and 1996 of
the U.S. statutory income tax rate and the effective rate of the income tax
provision allocated to continuing operations is as follows (in thousands):
1998 1997 1996
-------- -------- -------
Statutory tax rate at 35% $ 19,660 $ 15,734 $ 4,138
State income taxes, net of federal benefit 2,308 1,930 536
Other (1,745) (1,515) (363)
-------- -------- -------
$ 20,223 $ 16,149 $ 4,311
======== ======== =======
44
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
15. EARNINGS PER SHARE
Effective during the year ended April 30, 1998, the Company adopted
Statement No. 128. Statement No. 128 supersedes Accounting Principles Board
Opinion No. 15, Earnings Per Share and changes the presentation of earnings per
share. Statement No. 128 replaces the presentation of primary EPS and fully
diluted EPS with basic EPS and diluted EPS. Basic EPS is based on the weighted
average number of common shares outstanding. Diluted EPS is based on the
weighted average number of common shares outstanding and potentially dilutive
common shares, such as stock options. The Company has restated earnings per
share for all prior periods presented. (in thousands, except per share data)
FOR THE YEAR ENDED APRIL 30,
---------------------------------
1998 1997 1996
------- ------- -------
BASIC EARNINGS PER SHARE
Net Income $35,947 $28,807 $16,708
======= ======= =======
Weighted average number of common
shares outstanding 43,180 42,388 33,665
======= ======= =======
Earnings per share $ 0.83 $ .68 $ .50
======= ======= =======
DILUTED EARNINGS PER SHARE
Net Income $35,947 $28,807 $16,708
======= ======= =======
Weighted average number of common
shares outstanding 43,180 42,388 33,665
Common equivalent shares from stock
options using the treasury stock method 1,208 1,589 1,838
------- ------- -------
Shares used in the per share calculation 44,388 43,977 35,503
======= ======= =======
Earnings per share $ 0.81 $ 0.66 $ 0.47
======= ======= =======
16. RESTATEMENT
When the Company combined with Mentor Technologies and CDS in the year
ended April 30, 1997 in pooling-of-interests transactions, the Company did not
restate its consolidated financial statements retroactively. Recently, the
Company has discussed these transactions with the staff of the Securities and
Exchange Commission. Based in part on these discussions and recent information
available on the application of materiality in accounting for business
combinations, the Company has restated its consolidated balance sheets as of
April 30, 1998 and 1997, and the related consolidated statements of income,
stockholders' equity, and cash flows for the three years in the period ended
April 30, 1998 to reflect the retroactive combination of these two acquisitions.
45
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The impact of the restatement is summarized below (in thousands, except
for per share data):
Previously
At April 30, 1998 Reported Restated
---------- ----------
Additional paid-in capital $ 132,703 $ 132,940
Retained earnings 75,202 74,965
Previously
At April 30, 1997 Reported Restated
---------- ----------
Additional paid-in capital $ 125,926 $ 126,163
Retained earnings 41,002 40,765
Previously
For the year ended April 30, 1997 Reported Restated
---------- ----------
Revenue $2,178,566 $2,214,786
Income from continuing operations before
distributions on preferred securities of Trust 35,138 33,951
Net income 29,994 28,807
Earnings per share - diluted 0.69 0.66
Previously
For the year ended April 30, 1996 Reported Restated
---------- ----------
Revenue $1,804,813 $1,884,635
Income from continuing operations before
distributions on preferred securities of Trust 8,053 7,514
Net income 17,247 16,708
Earnings per share - diluted 0.50 0.47
46