UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 October 31, 1996
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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 number 1-14192
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VANSTAR CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Delaware 94-2376431
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
5964 West Las Positas Boulevard, Pleasanton, California 94588
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (510) 734-4000
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Indicate by check /X/ whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The number of outstanding shares of the Registrant's Common Stock, par
value $.001 per share, was 41,466,199 on November 29, 1996.
ITEM 1. FINANCIAL STATEMENTS
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
October 31, April 30,
1996 1996
(unaudited)
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Current assets:
Cash $ 12,090 $ 14,498
Receivables, net of allowance for doubtful accounts of
$10,386 at October 31, 1996, and $14,812 at April 30, 1996 302,024 298,484
Inventories 380,976 350,406
Deferred income taxes 13,511 25,750
Prepaid expenses and other current assets 6,933 2,432
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Total current assets 715,534 691,570
Property and equipment, net 25,226 23,183
Other assets, net 50,340 48,899
Goodwill, net of accumulated amortization of
$4,541 at October 31, 1996, and $3,453 at April 30, 1996 52,158 39,713
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$ 843,258 $ 803,365
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 299,038 $ 305,374
Accrued liabilities 41,679 41,586
Deferred revenue 25,469 27,109
Current maturities of long-term debt 2,365 1,759
Short-term borrowings 115,625 -
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Total current liabilities 484,176 375,828
Long-term debt, less current maturities 3,337 293,007
Other long-term liabilities 5,835 7,477
Commitments and contingencies - -
Company-obligated mandatorily redeemable convertible preferred
securities of financing trustholding solely convertible debentures 194,561 -
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized, 41,465,250 shares issued and outstanding
at October 31, 1996, 40,475,144 shares issued and
outstanding at April 30, 1996 41 40
Additional paid-in capital 122,552 115,097
Retained earnings 32,756 11,916
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Total stockholders' equity 155,349 127,053
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$ 843,258 $ 803,365
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See accompanying notes to consolidated financial statements.
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
October 31, October 31,
---------------------------- ----------------------------
1996 1995 1996 1995
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(unaudited) (unaudited)
Revenue:
Product $ 463,057 $ 389,030 $ 953,122 $ 763,113
Services 80,676 56,098 149,701 109,184
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Total revenue 543,733 445,128 1,102,823 872,297
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Cost of revenue:
Product 416,616 352,433 858,209 692,316
Services 45,836 30,343 85,211 58,734
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Total cost of revenue 462,452 382,776 943,420 751,050
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Gross margin 81,281 62,352 159,403 121,247
Selling, general and administrative expenses 59,340 46,772 116,237 93,134
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Operating income 21,941 15,580 43,166 28,113
Interest income 894 1,343 1,776 2,900
Interest expense (4,253) (9,064) (10,864) (17,894)
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Income before income taxes and distributions
on preferred securities of trust 18,582 7,859 34,078 13,119
Income tax provision (6,875) (2,908) (12,609) (4,854)
Distributions on convertible preferred securities
of trust, net of tax (See Note 3) (629) - (629) -
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Net income $ 11,078 $ 4,951 $ 20,840 $ 8,265
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Primary and fully diluted earnings per share (pro
forma prior to March 11, 1996 - See Note 2) $ 0.26 $ 0.15 $ 0.49 $ 0.25
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Shares used in per share calculation 42,805 33,024 42,440 33,029
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See accompanying notes to consolidated financial statements.
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
October 31,
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1996 1995
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,840 $ 8,265
Adjustments:
Depreciation and amortization 7,821 4,722
Change in provision for doubtful accounts (2,707) 1,294
Changes in operating assets and liabilities:
Receivables 25,002 3,031
Inventories (24,114) (48,510)
Prepaid expenses and other assets (4,033) (265)
Deferred income taxes 12,239 4,754
Accounts payable (13,682) 11,334
Accrued and other liabilities (5,919) 1,842
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Total adjustments (5,393) (21,798)
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Net cash provided by (used in) operating activities 15,447 (13,533)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of notes receivable - 4,496
Capital expenditures (7,159) (9,578)
Proceeds from sale of building 3,125 -
Purchase of businesses, net of cash acquired (35,633) -
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Net cash used in investing activities (39,667) (5,082)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (3,264) (384)
Borrowings under line of credit, net of payments (173,581) 15,174
Proceeds from issuance of convertible preferred securities of trust, net 194,561 -
Issuance of common stock and warrants 4,096 500
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Net cash provided by financing activities 21,812 15,290
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NET DECREASE IN CASH (2,408) (3,325)
Cash at beginning of the period 14,498 7,761
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CASH AT END OF THE PERIOD $ 12,090 $ 4,436
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See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The financial statements for Vanstar Corporation (the "Company") for the
three and six months ended October 31, 1996 and October 31, 1995 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 and cash flows for
the interim periods. These financial statements should be read in conjunction
with the Company's Annual Report on Form 10-K for the fiscal year ended April
30, 1996. The results of operations for the six months ended October 31, 1996
are not necessarily indicative of the results to be expected for the entire
fiscal year.
2. EARNINGS PER SHARE
Earnings per share and shares used in per share calculation for periods
prior to March 11, 1996, the date of the Company's initial public offering, have
been presented on the consolidated statements of income as if the conversion of
the Company's preferred stock and warrants had occurred at the later of the
beginning of the period or the issuance date.
Primary and fully 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.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock equivalents also include amounts computed on options and warrants
issued during the twelve months immediately preceding the date of the initial
filing of the Company's Registration Statement on Form S-1 relating to the
Company's initial public offering as if they were outstanding for all periods
prior to the closing on March 11, 1996 (using the treasury stock method and the
initial public offering price of $10.00).
3. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
FINANCING TRUST HOLDING SOLELY CONVERTIBLE DEBENTURES
On October 2, 1996, Vanstar Financing Trust, a Delaware statutory
business trust (the "Trust") with respect to which the Company owns all of the
common trust securities, completed a private placement of 3,500,000 Trust
Convertible Preferred Securities (the "Convertible Preferred Securities"). On
October 28, 1996, an additional 525,000 of the Convertible Preferred Securities
were sold. The Convertible Preferred Securities sold for and have a liquidation
value of $50 per security and are convertible at any time at the option of the
holder into shares of the Company's Common Stock at a conversion rate of 1.739
shares for each Convertible Preferred Security (equivalent to $28.75 per share
of the Company's Common Stock), subject to adjustment in certain circumstances.
Distributions on the Convertible Preferred Securities accrue at an annual rate
of 6.75% of the liquidation value of $50 per Convertible Preferred Security and
are included in Distributions on Convertible Preferred Securities of Trust, net
of tax in the consolidated statements of income. The proceeds of the private
placement, which totaled $194.5 million (net of underwriting discounts and
estimated offering expenses totaling $6.7 million) are included in Company-
Obligated Mandatorily Redeemable Convertible Preferred Securities of Financing
Trust Holding Solely Convertible Debentures in the consolidated balance sheet.
The Company guaranteed, on a subordinated basis (the "Guarantee"), payment of
(i) the distributions on the Convertible Preferred Securities, (ii) the amount
payable upon redemption of the Convertible Preferred Securities, and (iii) the
liquidation amount of the Convertible Preferred
Securities. The Guarantee will apply to payment of distributions, redemptions
and liquidations if and only to the extent the Trust has funds sufficient to
make such payments.
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 6.75% per annum 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 Convertible
Preferred Securities on a pro rata basis having an aggregate liquidation value
equal to the aggregate principal amount of the Debentures redeemed. The
Debentures represent substantially all the assets of the Trust. The Debentures
and related income statement effects are eliminated in the Company's
consolidated financial statements. The Company used the proceeds from the
issuance of the Debentures to repay a portion of amounts owed under its
financing agreement with IBM Credit Corporation ("IBMCC").
4. COMMITMENTS AND CONTINGENCIES
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's four primary sources of revenue are product, professional
services, life cycle services and other services. The Company refers to the
integration of its product and service offerings designed to provide customized
solutions to support its customers' PC network infrastructure throughout its
life cycle as "Life Cycle Management." Product revenue is primarily derived
from the sale of computer hardware, software, peripherals, and communications
devices manufactured by third parties and sold by the Company. Beginning with
fiscal year 1997, the Company realigned its service offerings to position
itself to better meet its customer's growing need to gain control of the
management and the escalating cost of distributed computing network
infrastructures. Professional services (formerly networking) revenue is derived
from network installation, enhancement and migration plus consulting services to
plan, design, manage, and implement new client/server technologies. Life cycle
services (formerly support services) revenue is derived from desktop support
services which encompass customized service, enhancement, and support solutions
required as a result of customer's outsourcing the ownership and management of
client/server environments. Desktop support services integrates the services
of desktop support, help desk, repair and maintenance, asset management and
desktop installation. Other services revenue is primarily derived from fees
earned on the distribution services agreement with Merisel FAB Inc. ("Merisel
FAB"), training and education services. Pursuant to a distribution services
agreement, the Company distributes product to franchises and affiliates of
Merisel FAB.
The following table sets forth for the periods indicated, the Company's (i)
total revenue, gross margin and gross margin percentage by revenue source,(ii)
selling, general and administrative expenses in total and as a percentage of
total revenue and (iii) operating income in total and as a percentage of total
revenue.
Three Months Ended Six Months Ended
October 31, October 31,
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REVENUE: 1996 1995 1996 1995
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Product $ 463,057 $ 389,030 $ 953,122 $ 763,113
Services:
Professional services 27,600 13,561 49,298 24,416
Life cycle services 42,532 34,031 81,471 67,515
Other services 10,544 8,506 18,932 17,253
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Total revenue $ 543,733 $ 445,128 $1,102,823 $ 872,297
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GROSS MARGIN:
Product $ 46,441 $ 36,597 $ 94,913 $ 70,797
Services:
Professional services 12,273 6,338 20,690 11,237
Life cycle services 14,548 12,091 29,033 24,514
Other services 8,019 7,326 14,767 14,699
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Total gross margin $ 81,281 $ 62,352 $ 159,403 $ 121,247
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GROSS MARGIN PERCENTAGE:
Product 10.0% 9.4% 10.0% 9.3%
Services:
Professional services 44.5% 46.7% 42.0% 46.0%
Life cycle services 34.2% 35.5% 35.6% 36.3%
Other services 76.1% 86.1% 78.0% 85.2%
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Total gross margin percentage 14.9% 14.0% 14.5% 13.9%
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Selling, general and
administrative expenses $ 59,340 $ 46,772 $ 116,237 $ 93,134
% of total revenue 10.9% 10.5% 10.5% 10.7%
Operating income $ 21,941 $ 15,580 $ 43,166 $ 28,113
% of total revenue 4.0% 3.5% 3.9% 3.2%
THREE MONTHS ENDED OCTOBER 31, 1996 AS COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 1995
PRODUCT. Revenue increased 19.0% to $463.0 million for the three months
ended October 31, 1996 from $389.0 million for the three months ended October
31, 1995 as a result of the Company's successful sales and marketing efforts and
increased sales resulting from the acquisition of the western regional
operations of Dataflex Corporation. Gross margin increased 26.9% to $46.4
million for the three months ended October 31, 1996 from $36.6 million for the
three months ended October 31, 1995. Gross margin percentage increased to 10.0%
for the three months ended October 31, 1996 from 9.4% for the three months ended
October 31, 1995. The increase in gross margin reflects the changing nature of
the Company's relationships with its customers in moving toward long-term
procurement services relationships as opposed to periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 103.5% to $27.6 million for the
three months ended October 31, 1996 from $13.6 million for the three months
ended October 31, 1995. This increase was a result of increasing customer
demand for the Company's higher-end consulting services, as well as the
Company's increased capacity to deliver such services. The Company believes
that increased customer demand resulted from the continuing transition by the
Company's customers to new higher performance technologies and increased
utilization of client/server networks. By the end of October 1996, the Company
employed approximately 1,100 system engineers as compared to approximately 600
in October 1995. Gross margin increased 93.6% to $12.2 million for the three
months ended October 31, 1996 from $6.3 million for the three months ended
October 31, 1995. Gross margin percentage decreased to 44.5% for the three
months ended October 31, 1996 from 46.7% for the three months ended October 31,
1995. The decrease in gross margin percentage resulted from an increase in
transitional training and deployment costs reflecting the Company's continued
commitment to hire and train additional systems engineers to support Microsoft
NT.
LIFE CYCLE SERVICES. Revenue increased 25.0% to $42.5 million for the
three months ended October 31, 1996 from $34.0 million for the three months
ended October 31, 1995. This increase reflects the increase in demand for
the Company's overall life cycle service offerings. Gross margin increased
20.3% to $14.5 million for the three months ended October 31, 1996 from $12.1
million for the three months ended October 31, 1995. Gross margin percentage
decreased slightly to 34.2% for the three months ended October 31, 1996 from
35.5% for the three months ended October 31, 1995.
OTHER SERVICES. Revenue increased 24.0% to $10.5 million for the three
months ended October 31, 1996 from $8.5 million for the three months ended
October 31, 1995 primarily due to the acquisition of Mentor Technologies LTD, an
Ohio limited partnership providing information technology training and
education. Gross margin increased 9.5% to $8.0 million for the three months
ended October 31, 1996 from $7.3 million for the three months ended October 31,
1995. Gross margin percentage decreased to 76.1% for the three months ended
October 31, 1996 from 86.1% for the three months ended October 31, 1995. The
decline in gross margin percentage was primarily the result of the higher
contribution of training and education revenue to total other services revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 26.9% to $59.3 million for the three
months ended October 31, 1996 from $46.8 million for the three months ended
October 31, 1995. Selling, general and administrative expenses as a percentage
of revenue increased slightly to 10.9% for the three months ended October 31,
1996 from 10.5% for the three months ended October 31, 1995.
OPERATING INCOME. Operating income increased 40.8% to $21.9 million for the
three months ended October 31, 1996 from $15.6 million for the three months
ended October 31, 1995. This increase was the result of the increase in
revenues and gross margin percentage, partially offset by an increase in
selling, general and administrative expenses as a percentage of revenue.
Operating income as a percentage of total revenue increased to 4.0% for the
three months ended October 31, 1996 from 3.5% for the three months ended October
31, 1995.
INTEREST. Interest expense is incurred primarily on borrowings under the
Company's financing agreement with IBMCC. Interest expense decreased 53.1% to
$4.3 million for the three months ended October 31, 1996 from $9.1 million for
the three months ended October 31, 1995 due to lower average borrowings and
lower interest rates. The decline in borrowings was the result of improved cash
flow from increased profitability combined with the issuance of the Debentures
in October 1996, the proceeds of which were used to repay borrowings under
the financing agreement with IBMCC (See note 3 of Notes to Consolidated
Financial Statements).
TAXES. The effective tax rate for the three months ended October 31, 1996
and October 31, 1995 of 37% was different than the U.S. statutory rate of 35%
due to state tax provisions. At October 31, 1996 and April 30, 1996, the
Company has recorded net deferred tax assets of $19.0 million and $31.3
million, respectively. The full realization of the deferred tax assets carried
at October 31, 1996 is dependent upon the Company achieving future pretax
earnings, prior to the expiration of the net operating loss carryforwards, of
$51.3 million. The net operating loss carryforwards expire in the years 2000
through 2010. Management believes that sufficient income will be generated from
operations to realize the net deferred tax assets.
DISTRIBUTIONS ON CONVERTIBLE PREFERRED SECURITIES OF TRUST, NET OF TAX. In
October, 1996, the Trust issued 4,025,000 Convertible Preferred Securities as
part of a refinancing plan directed at converting its long-term variable rate
debt to fixed rate obligations and reducing its overall interest costs.
Distributions on Convertible Preferred Securities accrue at an annual rate of
6.75% of the liquidation value of $50 per security and are included net of the
tax effect on the associated Debentures in Distributions on Convertible
Preferred Securities of Trust in the consolidated statements of income. (See
Note 3 of Notes to Consolidated Financial Statements.)
SIX MONTHS ENDED OCTOBER 31, 1996 AS COMPARED TO THE SIX MONTHS ENDED
OCTOBER 31, 1995
PRODUCT. Revenue increased 24.9% to $953.1 million for the six months ended
October 31, 1996 from $763.1 million for the six months ended October 31, 1995
as a result of the Company's successful sales and marketing efforts and
increased sales resulting from the acquisition of the western regional
operations of Dataflex Corporation. Gross margin increased 34.1% to $94.9
million for the six months ended October 31, 1996 from $70.8 million for the six
months ended October 31, 1995. Gross margin percentage increased to 10.0% for
the six months ended October 31, 1996 from 9.3% for the six months ended October
31, 1995. The increase in gross margin reflects the changing nature of the
Company's relationships with its customers in moving toward longer-term
procurement services relationships as opposed to periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 101.9% to $49.3 million for the
six months ended October 31, 1996 from $24.4 million for the six months ended
October 31, 1995. This increase was a result of increasing customer demand for
the Company's higher-end consulting services, as well as the Company's increased
capacity to deliver such services. The Company believes that increased customer
demand resulted from the continuing transition by the Company's customers to new
higher performance technologies and increased utilization of client/server
networks. By the end of October 1996, the Company employed approximately 1,100
system engineers as compared to approximately 600 in October 1995. Gross margin
increased 84.1% to $20.7 million for the six months ended October 31, 1996 from
$11.2 million for the six months ended October 31, 1995. Gross margin
percentage decreased to 42.0% for the six months ended October 31, 1996 from
46.0% for the six months ended October 31, 1995. The decrease in gross margin
percentage resulted from an increase in transitional training and deployment
costs reflecting the Company's continued commitment to hire and train additional
systems engineers to support Microsoft NT.
LIFE CYCLE SERVICES. Revenue increased 20.7% to $81.5 million for the
six months ended October 31, 1996 from $67.5 million for the six months ended
October 31, 1995. This increase reflects the increase in demand for the
Company's overall life cycle service offerings. Gross margin increased 18.4%
to $29.0 million for the six months ended October 31, 1996 from $24.5 million
for the six months ended October 31, 1995. Gross margin percentage decreased
slightly to 35.6% for the six months ended October 31, 1996 from 36.3% for
the six months ended October 31, 1995.
OTHER SERVICES. Revenue increased 9.7% to $18.9 million for the six months
ended October 31, 1996 from $17.3 million for the six months ended October 31,
1995 primarily due to the acquisition of Mentor Technologies LTD, an Ohio
limited partnership providing information technology training and education.
Gross margin increased 0.5% to $14.8 million for the six months ended October
31, 1996 from $14.7 million for the six months ended October 31, 1995. Gross
margin percentage decreased to 78.0% for the six months ended October 31, 1996
from 85.2% for the six months ended October 31, 1995. The decline in gross
margin percentage was primarily the result of the higher contribution of
training and education revenue to total other services revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 24.8% to $116.2 million for the six months
ended October 31, 1996 from $93.1 million for the six months ended October 31,
1995. Selling, general and administrative expenses as a percentage of revenue
decreased to 10.5% for the six months ended October 31, 1996 from 10.7% for the
six months ended October 31, 1995.
OPERATING INCOME. Operating income increased 53.5% to $43.2 million for the
six months ended October 31, 1996 from $28.1 million for the six months ended
October 31, 1995. This increase was the result of the increases in revenue,
gross margin percentage, and a decrease in selling, general and administrative
expenses as a percentage of revenue. Operating income as a percentage of total
revenue increased to 3.9% for the six months ended October 31, 1996 from 3.2%
for the six months ended October 31, 1995.
INTEREST. Interest expense is incurred primarily on borrowings under the
Company's financing agreement with IBMCC. Interest expense decreased 39.3% to
$10.9 million for the six months ended October 31, 1996 from $17.9 million for
the six months ended October 31, 1995 due to lower average borrowings and lower
interest rates. The decline in borrowings was the result of improved cash flow
from increased profitability combined with the issuance of the Convertible
Preferred Securities.
TAXES. The effective tax rate for the six months ended October 31, 1996 and
October 31, 1995 of 37% was different than the U.S. statutory rate of 35% due to
state tax provisions.
DISTRIBUTIONS ON CONVERTIBLE PREFERRED SECURITIES OF TRUST, NET OF TAX. In
October, 1996, the Trust issued 4,025,000 Convertible Preferred Securities as
part of a refinancing plan directed at converting its long-term variable rate
debt to fixed rate obligations and reducing its overall interest costs.
Distributions on Convertible Preferred Securities accrue at an annual rate of
6.75% of the liquidation value of $50 per security and are included net of the
tax effect on the associated Debentures in Distributions on Convertible
Preferred Securities of Trust in the consolidated statements of income. (See
Note 3 of Notes to Consolidated Financial Statements.)
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has a $300 million line of credit under the Financing
Program Agreement with IBMCC. At October 31, 1996 the Company had $245.7
million outstanding under this facility of which $130.1 million is included in
accounts payable and $115.6 million is classified as short-term borrowings.
Borrowings under the line of credit are subject to certain borrowing base
limitations and are secured by portions of the Company's inventory, accounts
receivable, and certain other assets. As of October 31, 1996 amounts borrowed
under the line of credit bear interest at prime minus 0.50%. The line of
credit expires October 31, 1997.
In October, 1996, the Trust, sold 4,025,000 Convertible Preferred Securities
at $50 per security to qualified institutional buyers and a limited number of
other institutional accredited investors and foreign investors. The aggregate
net proceeds to the Company totaled $194.6 million after selling expenses,
discounts and commissions. The Company used the net proceeds of the offering to
reduce the outstanding indebtedness to IBMCC as part of a refinancing plan
directed at converting its long-term variable rate debt to fixed rate
obligations and reducing its overall interest costs. The refinancing plan also
contemplates repayment of an additional portion of the indebtedness to IBMCC
with the proceeds of an accounts receivable-based asset securitization facility
expected to be completed during the third quarter of the current fiscal year.
As a result of improved profitability and decreases in accounts receivable,
partially offset by increases in inventory levels and decreases in accounts
payable, the Company's operating activities provided cash of $15.4 million for
the six months ended October 31, 1996. The decrease in receivables is primarily
the result of payments received on the Company's receivables from Merisel FAB.
The increases in inventory levels were in support of and as a result of higher
levels of product sales. The decrease in accounts payable is a result of
significant early pay vendor discounts taken in October 1996.
During the six months ending October 31, 1996, the Company used cash of
$35.6 million (net of cash acquired) to purchase the western regional operations
of Dataflex Corporation and $173.6 million to repay amounts borrowed under its
Financing Program Agreement with IBMCC. During this period, the Company also
used cash of $7.2 million for capital expenditures and plans to make additional
significant investments in its automated systems and its capital equipment
throughout the remainder of fiscal year 1997.
The Company believes that the cash generated from operations together with
its existing credit facilities and the planned accounts receivable
securitization facility will be sufficient to meet its cash requirements through
at least fiscal year 1998.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On October 2, 1996, Vanstar Financing Trust, a Delaware statutory
business trust (the "Trust") with respect to which the Company owns all of
the common trust securities, completed a private placement of 3,500,000 Trust
Convertible Preferred Securities ("Convertible Preferred Securities") to
certain initial purchasers. On October 28, 1996, an additional 525,000 of
the Convertible Preferred Securities were sold. The Convertible Preferred
Securities sold for $50 per security and are convertible at any time at the
option of the holder into shares of the Company's Common Stock at a
conversion rate of 1.739 shares for each Convertible Preferred Security
(equivalent to $28.75 per share of the Company's Common Stock), subject to
adjustment in certain circumstances. The net proceeds of the private
placement totaled $194.5 million (net of underwriting discounts and estimated
offering expenses totaling $6.7 million) and the total proceeds of $201.2
million were invested by the Trust in 6 3/4% Convertible Subordinated
Debentures due 2016 issued by the Company.
The transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act of 1933, as
amended, contained in Section 4(2) thereof. The securities were sold to a
limited number of persons, such persons were provided access to all relevant
information regarding the Company and/or represented to the Company that they
were "sophisticated" investors, and such persons represented to the Company that
the securities were purchased for investment purposes only and with no view
toward distribution.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the Stockholders of the Company was held on September
13, 1996. At the meeting, the stockholders elected eleven persons to serve as
directors until the next annual meeting of stockholders and until their
successors are duly elected and qualified, ratified the selection of Ernst and
Young, LLP as the Company's auditors for the fiscal year ending April 30, 1997
and approved the Company's 1996 Stock Option/Stock Issuance Plan pursuant to
which the Company may grant to directors, officers and employees of the Company
and independent consultants retained by the Company, shares or options to
purchase shares of the Company's Common Stock. The table below sets forth the
number of votes cast for, against and withheld, as well as the number of
abstentions and broker nonvotes, as to each such matter, including a separate
tabulation with respect to each nominee for office.
Matter Voted Number of Votes Number of Votes Number of
Upon Cast For Against/Withheld Abstentions
---- -------- ---------------- and Nonvotes
------------
A. Nominees for Directors:
William Y. Tauscher 32,215,401 60,800 0
Jeffrey S. Rubin 32,215,101 61,100 0
J. S. Amato 32,214,757 61,444 0
John W. Amerman 32,214,601 61,600 0
Richard H. Bard 32,215,401 60,800 0
Stephen W. Fillo 32,214,901 61,300 0
Stewart K.P. Gross 32,215,401 60,800 0
William H. Janeway 32,214,801 61,400 0
John R. Oltman 32,214,301 61,900 0
John L. Vogelstein 32,214,801 61,400 0
Josh S. Weston 32,214,601 61,600 0
B. Ratification of Selection
of Ernst & Young 32,271,816 990 3,395
C. 1996 Stock Option/
Stock Issuance Plan 24,382,866 5,937,992 64,943
ITEM 5. OTHER INFORMATION
Effective September 30, 1996, the Company entered into a reseller agreement
with Computer Associates International, Inc., providing the Company with a non-
exclusive right and license to distribute CA-UNICENTER software. Management
anticipates that this agreement will strengthen the Company's ability to provide
leading-edge enterprise management solutions for networked Windows NT
environments.
On October 15, 1996 the Company executed a Letter of Intent to acquire
Contract Data Services, Inc., a North Carolina corporation ("CDS"). The
aggregate consideration is expected to consist solely of the number of shares of
the Company's Common Stock equal to approximately $27.2 million divided by the
applicable exchange price. As currently proposed, the exchange price will be
the average closing price of the Company's Common Stock as reported on the NYSE
Composite Tape for the ten trading days ending on and including the second
trading day prior to the closing; provided, however, that such exchange price
shall not be less than $23 or more than $31 5/8. CDS is engaged in the delivery
of information technology services and the related computer hardware and
software. CDS operates in Alabama, Georgia, North Carolina, South Carolina,
Tennessee, Texas and Virginia. For the fiscal year ended March 31, 1996, CDS
reported revenues of approximately $74.3 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibits
No. Description
-------- -----------
4.1 Certificate of Trust of Vanstar Financing Trust (1)
4.2 Amended and Restated Declaration of Trust of Vanstar
Financing Trust dated as of October 2, 1996 among
Jeffrey S. Rubin, Leslie J. Alvarez, John J. Dunican,
Jr. And Wilmington Trust Company as trustees and
Vanstar Corporation as sponsor (1)
4.3 Indenture dated as of October 2, 1996 between Vanstar
Corporation as issuer and Wilmington Trust Company as
trustee (1)
4.4 Form of 6-3/4% Preferred Securities (included as
Exhibit A-1 to Exhibit 4.2 above)
4.5 Form of 6-3/4% Convertible Subordinated Debentures Due
2016 (included as Exhibit B to Exhibit 4.2 above)
4.6 Preferred Securities Guarantee Agreement dated October
2, 1996 between Vanstar Corporation as guarantor and
Wilmington Trust Company as preferred guarantee
trustee (1)
10.1* Amendment #5 to Vanstar Corporation Second Amended and
Restated Financing Program Agreement, dated September
25, 1996 by and between Vanstar Corporation and IBM
Credit Corporation
11.1* Computation of Per Share Earnings
27* Financial Data Schedule
* Filed herewith
(1) Incorporated by reference to Exhibits with the corresponding
number filed with the Registrant's Registration Statement on Form
S-1 (Reg. No. 333-16307) filed with the commission on November
18, 1996.
B. REPORTS ON FORM 8-K
The following reports on Form 8-K were filed during the quarter
ended October 31, 1996:
1. Report on Form 8-K dated August 27, 1996 reporting the
press release covering the offering of the Convertible
Preferred Securities.
2. Report on Form 8-K dated October 3, 1996 reporting the
press release covering the consummated sale of the
Convertible Preferred Securities.
SIGNATURE
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.
VANSTAR CORPORATION
[NAME OF REGISTRANT]
Dated: December 13, 1996 By: /s/ Jeffrey S. Rubin
----------------- -------------------------------------
Name: Jeffrey S. Rubin
Title: Vice Chairman,
Chief Financial Officer and
Director