Exhibit 99.2
VANSTAR CORPORATION
Page*
------
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998
and April 30, 1998 3
Consolidated Statements of Income for the Three and
Six Months Ended October 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity for the
Six Months Ended October 31, 1998 5
Consolidated Statements of Cash Flows for the Six
Months Ended October 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
*Pagination is the same as used in Vanstar Corporation's Quarterly Report on
Form 10-Q for the quarter ended October 31, 1998.
2
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
OCTOBER 31, APRIL 30,
1998 1998
----------- -----------
ASSETS (unaudited)
Current assets:
Cash $ 11,112 $ 9,476
Receivables, net of allowance for doubtful accounts of
$9,100 at October 31, 1998 and $8,262 at April 30, 1998 289,174 342,752
Inventories 231,726 470,474
Deferred income taxes 17,187 17,387
Prepaid expenses and other current assets 13,914 14,304
----------- -----------
Total current assets 563,113 854,393
Property and equipment, net 51,572 53,303
Other assets, net 63,010 81,272
Goodwill, net of accumulated amortization of $12,750 at October 31,
1998 and $10,113 at April 30, 1998 103,987 106,796
----------- -----------
$ 781,682 $ 1,095,764
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 165,476 $ 290,187
Accrued liabilities 50,399 63,590
Deferred revenue 41,032 21,869
Short-term borrowings 164,644 308,351
Current maturities of long-term debt 4,057 5,800
----------- -----------
Total current liabilities 425,608 689,797
Long-term debt, less current maturities 581 2,337
Other long-term liabilities 1,230 943
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,915 194,739
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,776,950 shares issued and outstanding at October 31, 1998,
43,489,030 shares issued and outstanding at April 30, 1998 44 43
Additional paid-in capital 134,939 132,940
Retained earnings (since a deficit elimination of $78,448
at April 30, 1994) 27,027 75,339
Accumulated other comprehensive (loss) (2,662) (374)
----------- -----------
Total stockholders' equity 159,348 207,948
----------- -----------
$ 781,682 $ 1,107,183
=========== ===========
See accompanying notes to consolidated financial statements
3
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenue:
Acquisition services $ 481,500 $ 624,899 $1,019,307 $ 1,206,148
Other services 121,895 116,850 239,250 216,235
----------- ----------- ----------- -----------
Total revenue 603,395 741,749 1,258,557 1,422,383
----------- ----------- ----------- -----------
Cost of revenue:
Acquisition services 444,039 566,068 933,461 1,090,713
Other services 70,372 70,027 144,347 133,438
----------- ----------- ----------- -----------
Total cost of revenue 514,411 636,095 1,077,808 1,224,151
----------- ----------- ----------- -----------
Gross margin 88,984 105,654 180,749 198,232
Selling, general and administrative expenses 110,185 79,701 205,086 153,159
Restructuring charges 12,009 -- 12,009 --
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (33,210) 25,953 (36,346) 45,073
Interest income 174 336 296 740
Financing expense, net (7,032) (8,277) (16,846) (14,069)
----------- ----------- ----------- -----------
Income (loss) from operations before income
taxes and distributions on preferred
securities of Trust (40,068) 18,012 (52,896) 31,744
Income tax benefit (provision) 4,424 (6,484) 9,042 (11,428)
----------- ----------- ----------- -----------
Income (loss) from operations before
distributions on preferred securities of
Trust (35,644) 11,528 (43,854) 20,316
Distributions on convertible preferred securities
of Trust, net of income taxes (2,229) (2,228) (4,458) (4,456)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (37,873) $ 9,300 $ (48,312) $ 15,860
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic $ (0.87) $ 0.22 $ (1.11) $ 0.37
=========== =========== =========== ===========
Diluted $ (0.87) $ 0.21 $ (1.11) $ 0.36
=========== =========== =========== ===========
COMMON SHARES AND EQUIVALENTS OUTSTANDING:
Basic 43,692 43,154 43,604 43,037
=========== =========== =========== ===========
Diluted 43,692 44,530 43,604 44,288
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements
4
VANSTAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------ PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ---------- --------- ------------- -------------
Balance at April 30, 1998 43,489 $ 43 $ 132,703 $ 75,576 $ (374) $ 207,948
Comprehensive income (loss):
Net (loss) -- -- -- (48,312) -- (48,312)
Other comprehensive income
(loss) net of income tax:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- (2,311) (2,311)
Foreign currency translation
adjustment -- -- -- -- 23 23
---------
Other comprehensive income
(loss) (2,288)
---------
Comprehensive income
(loss) (50,600)
Issuance of Common Stock:
Employee stock purchase plan 203 1 1,296 -- -- 1,297
Exercise of stock options,
including tax benefit 85 -- 703 -- -- 703
--------- --------- --------- --------- --------- ---------
Balance at October 31, 1998 43,777 $ 44 $ 134,702 $ 27,264 $ (2,662) $ 159,348
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
5
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
SIX MONTHS ENDED
OCTOBER 31,
---------------------------
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net income (loss) $ (48,312) $ 15,860
Adjustments:
Depreciation and amortization 16,595 11,177
Noncash restructuring and unusual charges 39,053 --
Deferred income taxes 1,500 8,920
Provision for doubtful accounts 2,745 53
Noncash financing expense 123 --
Changes in operating assets and liabilities:
Receivables 58,118 (81,298)
Inventories 231,338 (59,463)
Prepaid expenses and other assets (4,708) (18,856)
Accounts payable (124,535) 47,596
Accrued and other liabilities (11,190) (5,309)
--------- ---------
Total adjustments 209,039 (97,180)
--------- ---------
Net cash provided by (used in) operating activities 160,727 (81,320)
Cash Flows from Investing Activities:
Capital expenditures (12,575) (13,967)
Purchase of business, net of cash acquired -- (32,486)
--------- ---------
Net cash used in investing activities (12,575) (46,453)
Cash Flows from Financing Activities:
Payments on long-term debt (4,576) (7,367)
Borrowings (repayments) under line of credit, net (143,707) 136,220
Issuance of common stock 1,767 3,177
--------- ---------
Net cash (used in) provided by financing activities (146,516) 132,030
--------- ---------
Net increase in cash 1,636 4,257
Cash at beginning of the period 9,476 5,686
--------- ---------
Cash at end of the period $ 11,112 $ 9,943
========= =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $ 12,520 $ 7,078
Discounts and net expenses on receivables securitization 5,719 5,860
Distributions on preferred securities of Trust 6,792 6,792
Income taxes (refunds), net (510) 4,942
See accompanying notes to consolidated financial statements
6
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(Continued)
SIX MONTHS ENDED
OCTOBER 31,
-----------------------
1998 1997
-------- --------
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital leases $ 1,127 $ 122
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Reporting
The financial statements for Vanstar Corporation ("Vanstar" or the
"Company") for the three and six months ended October 31, 1998 and October 31,
1997 are unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and Securities and
Exchange Commission regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
for a fair presentation of the financial position, results of operations,
stockholders' equity and cash flows for the interim periods. The results of
operations for the three and six months ended October 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1998. Certain prior period amounts have
been reclassified to conform to the current presentation.
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. New
Accounting Pronouncements
The Financial Accounting Standards Board has issued Financial
Accounting Standards Board ("FASB") Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is applicable for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments in annual and
interim financial statements, although this statement is not required to be
applied to interim financial statements in the initial year of its application.
Therefore, these disclosures will be included for the first time in the
Company's annual financial statements for the year ending April 30, 1999. The
statement defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The statement requires that segment profit or loss,
certain specific revenue and expense items and segment assets be reported, as
well as reconciled to the financial statements.
2. PROPOSED MERGER WITH INACOM
On October 8, 1998, Vanstar Corporation and InaCom Corp., a Delaware
corporation ("InaCom"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"), providing for InaCom to acquire the Company through the
merger of a wholly-owned subsidiary of InaCom with and into the Company. Under
the terms of the Merger Agreement, holders of the Company's common stock, par
value $.001 per share (the "Common Stock"), generally will receive 0.64 shares
of InaCom common stock, par value $.10 per share ("InaCom Common Stock"), in
exchange for each share of the Common Stock held by such person at the time of
consummation of the merger. The transaction, which is subject to regulatory and
stockholder approval, and certain other customary closing conditions, is
expected to close in January of 1999. The merger is intended to qualify as a
pooling of interests for accounting and financial reporting purposes and
generally to be tax-free to the stockholders of both companies for Federal
income tax purposes.
As inducements to enter into the Merger Agreement, (1) InaCom granted
the Company an option to purchase up to 3,336,689 shares of InaCom Common Stock
at an exercise price of $17.375 per share and (2) Vanstar granted
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InaCom an option to purchase up to 8,709,623 shares of Common Stock at an
exercise price of $9.125 per share. Each option is exercisable following an
acquisition proposal for the issuing company and the occurrence of certain
further triggering events, none of which has occurred as of the date hereof.
3. EARNINGS PER SHARE
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.
4. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT
SECURITIES OF THE COMPANY
During October 1996, Vanstar Financing Trust, a Delaware statutory
business trust of which the Company owns all of the common trust securities (the
"Trust"), sold 4,025,000 Trust Convertible Preferred Securities ("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, net of income taxes" in the Consolidated
Statements of Income. The proceeds of the private placement, which totaled
approximately $194.4 million (net of initial purchasers' discounts and 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 6 3/4% Convertible
Subordinated Debentures due 2016 (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
on a pro rata basis Preferred Securities having an aggregate liquidation value
equal to the aggregate principal amount of the Debentures redeemed. The sole
asset of the Trust is $207.5 million aggregate principal amount of the
Debentures. The Debentures and related income statement effects are eliminated
in the Company's consolidated financial statements.
5. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established a revolving funding trade
receivables securitization facility (the "Securitization Facility"), which
currently provides the Company with up to $175 million in available credit. In
connection with the Securitization Facility, the Company sells, on a revolving
basis, certain of its trade receivables ("Pooled Receivables") to the special
purpose corporation, which in turn sells a percentage ownership 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 $321.5 million at October 31, 1998, is reflected as a reduction to
receivables. The Company retains an interest in certain amounts of the assets
sold. At October 31, 1998, the amount of that retained interest totaled $161.2
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
9
recognized in the Consolidated Balance Sheets. The gross proceeds resulting from
the sale of the percentage ownership interests in the Pooled Receivables totaled
$170 million as of October 31, 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
$2.7 million, $5.8 million, $3.1 million and $5.9 million are included in
Financing expenses, net on the Consolidated Statements of Income for the three
and six months ended October 31, 1998 and 1997, respectively.
6. FINANCING EXPENSES, NET
Financing expenses, net includes interest incurred on borrowings under
the Company's financing agreement with IBM Credit Corporation ("IBMCC") and
discounts and net expenses associated with the Securitization Facility.
7. ACQUISITIONS
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 the Company's common
stock based on the financial performance of the acquired business for the period
from July 8, 1997 through April 30, 1999. Based on the financial performance of
the acquired business through October 31, 1998, it is unlikely that the Company
will make the payment of contingent shares. The Sysorex acquisition was
accounted for as a purchase and the excess of the cost over the fair value of
net assets acquired is being amortized on a straight line basis over 20 years.
8. COMMITMENTS AND CONTINGENCIES
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 named 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 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 July 23, 1998, the
California Superior Court dismissed the state court complaint as to certain
individual defendants. The plaintiffs subsequently have agreed to dismiss the
state court complaint as to all remaining defendants other than the Company and
Richard Bard, a director of the Company. 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.
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9. RESTRUCTURING AND UNUSUAL CHARGES
In August 1998, Vanstar announced a program to reduce expenses in line
with expected revenue and industry dynamics. The program included both items
that qualify as restructuring costs as defined by Emerging Issues Task Force
94-3 and other unusual charges. This program to reduce expenses included a
reduction in workforce and elimination of some of its facilities through
consolidation during the second quarter in accordance with approved management
plans. The Company also wrote-off equipment and systems associated with the
support of certain finance functions that were affected by the realignment of
the business into two operating units and the reduction of workforce. In
addition, the Company wrote-off redundant equipment and systems associated with
the centralized service dispatch and scheduling functions. The Company also
liquidated excess spare parts due to the centralization of its spare parts
management and the outsourcing of a substantial portion of its spare parts
procurement and repair to a single vendor.
Restructuring Charges
Restructuring charges include the cost of facility closures and
consolidations, involuntary employee separation benefits and related costs
associated with business realignment and restructuring actions in accordance
with approved management plans. Facility closure costs of $6.0 million include
future lease payments, costs to abandon or dispose of property and equipment and
capitalized software, net of estimates of sublease revenues and disposal values.
Employee separation benefits of $3.0 million include severance, medical and
other benefits for approximately 250 permanent full-time employees. Reductions
occurred in virtually all areas of the Company. Business realignment costs
relate to the decision to exit the discrete training business as the Company
focuses on its core competencies as part of the realignment of the Company into
two distinct operating units, contract termination costs and other related costs
and are $3.0 million. In connection with the restructuring, the Company recorded
restructuring reserves of approximately $7.4 million, of which $4.1 has been
paid through October 31, 1998. The remaining liability of $3.3 million primarily
relates to the future lease obligations, net of estimates of sublease income.
Unusual Charges
Unusual charges not qualifying as restructuring are reflected in
selling, general and administrative expenses and cost of revenue and consist
primarily of the write-off of certain equipment and capitalized software, costs
to liquidate excess spare parts and inventory adjustments. Capitalized software
and lease costs of $9.0 million include the write-off of systems associated with
the centralized dispatch and scheduling functions and obsolete hardware and
software due to the upgrade of call technology implemented by the Company. The
Company also liquidated excess spare parts due to the centralization of its
spare parts management and the outsourcing of a substantial portion of its spare
parts procurement and repair to a single vendor, resulting in a net charge of
$16.5 million. Inventory adjustments of $5.4 million include costs associated
with the early return of certain inventory items to a major vendor in an effort
to reduce interest expense and additional inventory reserves to record inventory
at lower of cost or market due to the reduced price protection available from
major vendors as part of the supply chain reengineering. Other items of $2.4
million consist primarily of the incentive pay to retain certain employees
during the restructuring activities and costs associated with the termination of
certain marketing commitments.
As the Company implements its strategic plan to respond to current
industry dynamics, there can be no assurance that additional restructuring
actions will not be required. In addition, there can be no assurance that the
estimated costs of the restructuring program will not change.
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10. COMPREHENSIVE INCOME
Effective for the quarter ended July 31, 1998, the Company adopted FASB
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes standards for the reporting and display of comprehensive income
in a full set of general purpose financial statements, however, the adoption of
this statement has no impact on the Company's net income or stockholders'
equity. Comprehensive income includes net income plus items that, under
generally accepted accounting principles, are excluded from net income and are
reflected as a component of equity, such as currency translation adjustments and
unrealized gains and losses on available-for-sale securities. Statement 130 also
requires the accumulated balance of other comprehensive income to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Prior period financial
statements have been reclassified to conform to the requirements of Statement
130.
The components of comprehensive income, net of related tax, for the
three and six months periods ended October 31, 1998 and 1997 are as follows (in
thousands):
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss) $(37,873) $ 9,300 $(48,312) $ 15,860
Unrealized (losses) on securities (1,997) (2,027) (2,311) (2,864)
Foreign currency translation adjustment -- -- 23 --
-------- -------- -------- --------
Comprehensive income (loss) $(39,870) $ 7,273 $(50,600) $ 12,996
======== ======== ======== ========
The components of accumulated other comprehensive income, net of
related tax, at October 31, 1998 and April 30, 1998 are as follows (in
thousands):
October 31, April 30,
1998 1998
----------- -----------
Unrealized (losses) on securities $ (2,518) $ (207)
Foreign currency translation adjustments (144) (167)
---------- ----------
Accumulated comprehensive (loss) $ (2,662) $ (374)
========== ==========
12