UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
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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 of (I.R.S. Employer
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 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
----- -----
The number of outstanding shares of the Registrant's Common Stock, par
value $.001 per share, was 42,970,424 on March 11, 1997.
ITEM 1. FINANCIAL STATEMENTS
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
January 31, April 30,
1997 1996
----------- ---------
(unaudited)
Current assets:
Cash $ 4,955 $ 14,498
Receivables, net of allowance for doubtful accounts of $9,145
at January 31, 1997, and $14,812 at April 30, 1996 (see note 4) 168,590 298,484
Inventories, net 317,798 350,406
Deferred income taxes 10,257 25,750
Prepaid expenses and other current assets 7,616 2,432
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Total current assets 509,216 691,570
Property and equipment, net 30,187 23,183
Other assets, net 64,382 48,899
Goodwill and other intangibles, net of accumulated amortization of
$5,845 at January 31, 1997 and $3,453 at April 30, 1996 56,429 39,713
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$660,214 $803,365
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $221,457 $305,374
Accrued liabilities 39,278 41,586
Deferred revenue 19,996 27,109
Short-term borrowings 11,679 -
Current maturities of long-term debt 4,164 1,759
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Total current liabilities 296,574 375,828
Long-term debt, less current maturities 4,377 293,007
Other long-term liabilities 3,162 7,477
Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust holding solely convertible subordinated
debt securities of the Company* (see note 3) 194,433 -
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares
authorized, 42,781,569 shares issued and outstanding
at January 31, 1997, 40,475,144 shares issued and
outstanding at April 30, 1996 43 40
Additional paid-in capital 123,833 115,097
Retained earnings 37,792 11,916
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Total stockholders' equity 161,668 127,053
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$660,214 $803,365
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-------- --------
* The sole asset of the trust is $207,474,200 aggregate principal amount of the
Company's 6 3/4% Convertible Subordinated Debentures due 2016.
See accompanying notes to consolidated financial statements.
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------- -----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(unaudited) (unaudited)
Revenue:
Product $438,587 $391,130 $1,391,709 $1,154,243
Services 88,955 55,732 238,656 164,916
-------- -------- ---------- ----------
Total revenue 527,542 446,862 1,630,365 1,319,159
-------- -------- ---------- ----------
Cost of revenue:
Product 395,093 354,876 1,253,302 1,047,192
Services 55,781 33,096 140,992 91,830
-------- -------- ---------- ----------
Total cost of revenue 450,874 387,972 1,394,294 1,139,022
-------- -------- ---------- ----------
Gross margin 76,668 58,890 236,071 180,137
Selling, general and administrative expenses 60,489 76,891 176,726 170,025
-------- -------- ---------- ----------
Operating income (loss) 16,179 (18,001) 59,345 10,112
Interest income 1,155 1,293 2,931 4,193
Financing expenses, net (see note 5) (2,542) (9,851) (13,406) (27,745)
-------- -------- ---------- ----------
Income (loss) from continuing operations before
income taxes and distributions on preferred
securities of trust 14,792 (26,559) 48,870 (13,440)
Income tax benefit (provision) (4,984) 9,828 (17,593) 4,974
-------- -------- ---------- ----------
Income (loss) from continuing operations before
distributions on preferred securities of trust 9,808 (16,731) 31,277 (8,466)
Gain on disposal of discontinued
businesses (less income taxes of $5,400) - 9,194 - 9,194
Distributions on convertible preferred securities
of trust, net of tax (see note 3) (2,287) - (2,916) -
-------- -------- ---------- ----------
Net income (loss) $ 7,521 $ (7,537) $ 28,361 $ 728
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Primary and fully diluted earnings (loss) per share:
(Pro forma prior to March 11, 1996 - see note 2)
Continuing operations $ 0.17 $ (0.53) $ 0.65 $ (0.26)
Discontinued operations - 0.29 - 0.28
-------- -------- ---------- ----------
$ 0.17 $ (0.24) $ 0.65 $ 0.02
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-------- -------- ---------- ----------
Shares used in per share calculation 44,234 31,249 43,393 32,972
-------- -------- ---------- ----------
-------- -------- ---------- ----------
See accompanying notes to consolidated financial statements.
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
January 31,
-------------------
1997 1996
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 28,361 $ 728
Adjustments:
Depreciation and amortization 12,429 7,134
Change in provision for doubtful accounts (7,790) 32,615
Changes in operating assets and liabilities:
Receivables 171,647 (17,801)
Inventories 39,411 (40,324)
Prepaid expenses and other assets (5,645) (1,525)
Deferred income taxes 15,953 327
Accounts payable (97,756) (15,152)
Accrued and other liabilities (16,569) 3,119
--------- --------
Total adjustments 111,680 (31,607)
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Net cash provided by (used in) operating activities 140,041 (30,879)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment of notes receivable - 4,496
Capital expenditures (16,991) (12,587)
Proceeds from sale of building 3,125 -
Purchase of businesses, net of cash acquired (44,585) -
--------- --------
Net cash used in investing activities (58,451) (8,091)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (12,806) (5,144)
Borrowings (repayments) on line of credit, net (277,488) 45,090
Proceeds from issuance of convertible
preferred securities of trust, net 194,433 -
Issuance of common stock and warrants 4,728 649
--------- --------
Net cash provided by (used in) financing activities (91,133) 40,595
--------- --------
NET INCREASE (DECREASE) IN CASH (9,543) 1,625
Cash at beginning of the period 14,498 7,761
--------- --------
CASH AT END OF THE PERIOD $ 4,955 $ 9,386
--------- --------
--------- --------
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 nine months ended January 31, 1997 and January 31, 1996 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. 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. 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 nine months ended January 31, 1997 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 per share).
3. 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 (the "Trust") with respect to which the Company owns all of
the common trust securities, sold 4,025,000 Trust Convertible Preferred
Securities ("Convertible Preferred Securities"). The Convertible Preferred
Securities were initially 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 a conversion price of
$28.75 per share of the Company's Common Stock), subject to adjustment in
certain circumstances. Distributions on Convertible Preferred Securities
accrue at an annual rate of 6 3/4% 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 initial purchasers' discounts and estimated offering
expenses totaling $6.7 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 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. Considered together, the Guarantee provides a full and unconditional
guarantee by the Company of the Convertible 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 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 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.
4. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company established a five-year
Securitization Facility (the "Securitization Facility") which 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"). These transactions have been recorded
as a sale in accordance with Statement of Financial Accounting Standards No.
125, accounting for transfers and servicing of financial assets and
extinguishments of liabilities. The Company retains an interest in certain of
the assets sold. At January 31, 1997, the amount of that retained interest
totaled $67.4 million and is included in receivables on the Consolidated Balance
Sheets. 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 in the Consolidated Balance Sheets. The gross proceeds
resulting from the sale of the percentage ownership interests to PAR totaled
$175 million as of January 31, 1997 representing the maximum available credit
under the Securitization Facility. 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
$0.9 million are included in financing expenses, net on the Consolidated
Statements of Income.
5. FINANCING EXPENSES, NET
Financing expenses, net includes interest incurred on borrowings under the
Company's financing agreement with IBMCC and discounts and net expenses
associated with the Company's Securitization Facility.
6. 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 liabilities previously associated with the business
operations of Dataflex known as the Dataflex Western Region and Dataflex
Southwest Region ("Dataflex Regions"). The Dataflex Regions offer 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, net of cash received, was $36.7 million.
On September 4, 1996, the Company merged with Mentor Technologies, Ltd., an
Ohio limited partnership ("Mentor Technologies") providing training and
education services in Ohio and throughout the upper mid-western United States.
A total of 300,000 shares of Company's Common Stock (having an aggregate value
on the closing date of approximately $6.0 million) were issued in connection
with the merger. For the calendar year ended December 31, 1995, Mentor
Technologies reported revenues of approximately $5.5 million.
On December 16, 1996, the Company merged with Contract Data Services, Inc.,
a North Carolina corporation ("CDS"), in exchange for 952,491 shares of the
Company's Common Stock (having an aggregate
value on the closing date of approximately $21.9 million). Ten percent of
those shares were deposited into escrow to satisfy certain indemnification
obligations of CDS expected to be determined over the next year. CDS
provides 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.
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
made an advance payment of $4.0 million towards the purchase price of the assets
pending subsequent determination of the value of such assets. In addition, DCT
could receive a maximum of 180,000 shares of the Company's Common Stock upon the
satisfaction of certain conditions. 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
Company's Common Stock.
7. 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
materially 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
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Quarterly Report on Form 10-Q
contain forward looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed
in the forward looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in the Company's
Annual Report on Form 10-K.
RESULTS OF OPERATIONS
During the nine months ended January 31, 1997, the Company's results of
operations were impacted by the following transactions. On May 24, 1996, the
Company acquired substantially all of the assets and liabilities of the
western and southwestern regions of Dataflex Corporation (the "Dataflex
Regions"). The Dataflex Regions offer PC product distribution, service and
support in the states of Arizona, California, Colorado, Nevada, New Mexico,
and Utah with combined revenues of $145 million reported for the fiscal year
ended March 31, 1996. On September 4, 1996, the Company merged with Mentor
Technologies, Ltd., an Ohio limited partnership ("Mentor Technologies"),
providing training and education services in Ohio and throughout the upper
mid-western United States with reported revenues of $5.5 million for the
calendar year ended December 31, 1995. During October 1996, the Company,
through the Vanstar Financing Trust, a Delaware statutory business trust (the
"Trust"), issued 4,025,000 Trust Convertible Preferred Securities
("Convertible Preferred Securities") as part of its overall refinancing plan
to reduce its financing costs. Those securities are convertible into the
Company's Common Stock and pay cumulative cash distributions at an annual
rate of 6 3/4% of the liquidation amount of $50 per security. On December
16, 1996, the Company merged with Contract Data Services, Inc. ("CDS"), a
North Carolina corporation with reported revenues of $74.3 million for the
fiscal year ended March 31, 1996. CDS provides outsourcing of integrated
information technology services, related technical support services and
procurement of computer hardware and software.
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 communication 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 customers' 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
customers outsourcing the ownership and management of client/server
environments. Desktop support services integrate 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"),
and 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 Nine Months Ended
January 31, January 31,
------------------- -----------------------
REVENUE: 1997 1996 1997 1996
-------- -------- ---------- ----------
Product $438,587 $391,130 $1,391,709 $1,154,243
Services:
Professional services 30,555 16,514 79,852 40,930
Life cycle services 47,944 34,758 129,415 102,273
Other services 10,456 4,460 29,389 21,713
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Total revenue $527,542 $446,862 $1,630,365 $1,319,159
-------- -------- ---------- ----------
-------- -------- ---------- ----------
GROSS MARGIN:
Product $ 43,494 $ 36,254 $ 138,407 $ 107,051
Services:
Professional services 9,995 6,353 30,685 17,590
Life cycle services 16,762 13,075 45,795 37,589
Other services 6,417 3,208 21,184 17,907
-------- -------- ---------- ----------
Total gross margin $ 76,668 $ 58,890 $ 236,071 $ 180,137
-------- -------- ---------- ----------
-------- -------- ---------- ----------
GROSS MARGIN PERCENTAGE:
Product 9.9% 9.3% 9.9% 9.3%
Services:
Professional services 32.7% 38.5% 38.4% 43.0%
Life cycle services 35.0% 37.6% 35.4% 36.8%
Other services 61.4% 71.9% 72.1% 82.5%
-------- -------- ---------- ----------
Total gross margin
percentage 14.5% 13.2% 14.5% 13.7%
-------- -------- ---------- ----------
-------- -------- ---------- ----------
Selling, general and
administrative expenses $ 60,489 $ 76,891 $ 176,726 $ 170,025
% of total revenue 11.5% 17.2% 10.8% 12.9%
Operating income (loss) $ 16,179 $(18,001) $ 59,345 $ 10,112
% of total revenue 3.1% (4.0)% 3.6% 0.8%
THREE MONTHS ENDED JANUARY 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
JANUARY 31, 1996
PRODUCT. Revenue increased 12.1% to $438.6 million for the three months
ended January 31, 1997 from $391.1 million for the three months ended January
31, 1996 as a result of the Company's successful sales and marketing efforts and
increased sales resulting from the acquisitions of CDS and the Dataflex Regions.
Gross margin increased 20.0% to $43.5 million for the three months ended January
31, 1997 from $36.3 million for the three months ended January 31, 1996. Gross
margin percentage increased to 9.9% for the three months ended January 31, 1997
from 9.3% for the three months ended January 31, 1996. The increase in gross
margin percentage reflects the changing nature of the Company's relationships
with its customers in moving toward long-term procurement service relationships
as opposed to periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 85.0% to $30.6 million for the
three months ended January 31, 1997 from $16.5 million for the three months
ended January 31, 1996. This increase was a result of increasing customer
demand for the Company's higher-end consulting services and increased sales
resulting from the CDS acquisition. 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 January 1997, the Company employed
approximately 1,350 system engineers as compared to approximately 800 in January
1996. Gross margin increased 57.3% to $10.0 million for the three months ended
January 31, 1997 from $6.4 million for the three months ended January 31, 1996.
Gross margin percentage decreased to 32.7% for the three months ended January
31, 1997 from 38.5% for the three months ended January
31, 1996. 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 system engineers to support
Microsoft NT. Additionally, during the three months ended January 31, 1997,
customer holiday closures impacted scheduling and prevented full utilization
of the Company's system engineers and other technical resources.
LIFE CYCLE SERVICES. Revenue increased 37.9% to $47.9 million for the three
months ended January 31, 1997 from $34.8 million for the three months ended
January 31, 1996. This increase was the result of increased demand for the
Company's overall life cycle service offerings plus increased sales as a result
of the acquisition of CDS. Gross margin increased 28.2% to $16.8 million for
the three months ended January 31, 1997 from $13.1 million for the three months
ended January 31, 1996. Gross margin percentage decreased to 35.0% for the
three months ended January 31, 1997 from 37.6% for the three months ended
January 31, 1996.
OTHER SERVICES. Revenue increased 134.4% to $10.5 million for the three
months ended January 31, 1997 from $4.5 million for the three months ended
January 31, 1996 primarily due to the acquisition of Mentor Technologies. Gross
margin increased 100.0% to $6.4 million for the three months ended January 31,
1997 from $3.2 million for the three months ended January 31, 1996. Gross
margin percentage decreased to 61.4% for the three months ended January 31, 1997
from 71.9% for the three months ended January 31, 1996. 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. During the three months ended
January 31, 1996, the Company recorded a $31.1 million provision against its
receivables due from Merisel FAB. Excluding the $31.1 million provision,
selling, general and administrative expenses increased by 32.1% to $60.5 million
for the three months ended January 31, 1997 from $45.8 million for the three
months ended January 31, 1996. Excluding the $31.1 million provision, selling,
general and administrative expenses as a percentage of revenue increased to
11.5% for the three months ended January 31, 1997 from 10.2% for the three
months ended January 31, 1996. The increase in selling, general and
administrative expenses as a percentage of revenues was primarily the result of
an increase in the mix of service revenue to product revenue.
OPERATING INCOME. Excluding the $31.1 million provision, operating income
increased 23.6% to $16.2 million for the three months ended January 31, 1997
from $13.1 million for the three months ended January 31, 1996. 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 3.1% for the three months ended January 31, 1997 from 2.9% for the
three months ended January 31, 1996.
FINANCING EXPENSES, NET. Financing expenses, net for the three
months ended January 31, 1997 and 1996 represents primarily interest incurred on
borrowings under the Company's financing agreement with IBM Credit Corporation
("IBMCC"). During the three months ended January 31, 1997 financing expenses,
net also includes discounts and net expenses totaling $0.9 million associated
with the sales of certain trade receivables in connection with the Company's
Securitization Facility (see note 4 of Notes to Consolidated Financial
Statements). Financing expenses decreased 74.2% to $2.5 million for the three
months ended January 31, 1997 from $9.9 million for the three months ended
January 31, 1996 due to significantly lower average borrowings, lower interest
rates and cost reductions resulting from the sales of certain trade receivables.
The decline in borrowings which resulted in lower financing expenses was due to
the issuance of the Debentures to the Trust in October 1996, the proceeds of
which were used to repay borrowings under the financing agreement with IBMCC,
combined with improved cash flow from increased profitability and lower
inventory levels (see note 3 of Notes to Consolidated Financial Statements).
TAXES. The effective tax rates for the three months ended January 31, 1997
and 1996 of 36% and 37%, respectively, were different than the U.S. statutory
rate of 35% due to state tax provisions. At January 31, 1997 and April 30,
1996, the Company has recorded net deferred tax assets of $15.3 million and
$31.3 million, respectively. The full realization of the deferred tax assets
carried at January 31, 1997 is dependent upon the Company achieving future
pretax earnings, prior to the expiration of the net operating loss
carryforwards, of $42.5 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 reducing the Company's overall
interest costs. Distributions on Convertible Preferred Securities accrue at
an annual rate of 6 3/4% of the liquidation value of $50 per security and are
included in "distributions on convertible preferred securities of trust, net
of tax" in the Consolidated Statements of Income (see note 3 of Notes to
Consolidated Financial Statements).
NINE MONTHS ENDED JANUARY 31, 1997 AS COMPARED TO THE NINE MONTHS ENDED
JANUARY 31, 1996
PRODUCT. Revenue increased 20.6% to $1.4 billion for the nine months ended
January 31, 1997 from $1.2 billion for the nine months ended January 31, 1996 as
a result of the Company's successful sales and marketing efforts and increased
sales resulting from the acquisitions of CDS and Dataflex Regions. Gross margin
increased 29.3% to $138.4 million for the nine months ended January 31, 1997
from $107.1 million for the nine months ended January 31, 1996. Gross margin
percentage increased to 9.9% for the nine months ended January 31, 1997 from
9.3% for the nine months ended January 31, 1996. The increase in gross margin
percentage reflects the changing nature of the Company's relationships with its
customers in moving toward longer-term procurement service relationships as
opposed to periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 95.1% to $79.9 million for the
nine months ended January 31, 1997 from $40.9 million for the nine months ended
January 31, 1996. 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 January 1997, the Company employed approximately 1,350
system engineers as compared to approximately 800 in January 1996. Gross margin
increased 74.4% to $30.7 million for the nine months ended January 31, 1997 from
$17.6 million for the nine months ended January 31, 1996. Gross margin
percentage decreased to 38.4% for the nine months ended January 31, 1997 from
43.0% for the nine months ended January 31, 1996. 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
system engineers to support Microsoft NT.
LIFE CYCLE SERVICES. Revenue increased 26.5% to $129.4 million for the nine
months ended January 31, 1997 from $102.3 million for the nine months ended
January 31, 1996. This increase was the result of increased demand for the
Company's overall life cycle service offerings plus increased sales as a result
of the acquisition of CDS. Gross margin increased 21.8% to $45.8 million for
the nine months ended January 31, 1997 from $37.6 million for the nine months
ended January 31, 1996. Gross margin percentage decreased slightly to 35.4% for
the nine months ended January 31, 1997 from 36.8% for the nine months ended
January 31, 1996.
OTHER SERVICES. Revenue increased 35.4% to $29.4 million for the nine
months ended January 31, 1997 from $21.7 million for the nine months ended
January 31, 1996 primarily due to the acquisition of Mentor Technologies. Gross
margin increased 18.3% to $21.2 million for the nine months ended January 31,
1997 from $17.9 million for the nine months ended January 31, 1996. Gross
margin percentage decreased to 72.1% for the nine months ended January 31, 1997
from 82.5% for the nine months ended January 31, 1996. 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. During the nine months ended
January 31, 1996, the Company recorded a $31.1 million provision against its
receivables due from Merisel FAB. Excluding the $31.1 million provision,
selling, general and administrative expenses increased by 27.2% to $176.7
million for the nine months ended January 31, 1997 from $138.9 million for the
nine months ended January 31, 1996. Excluding the provision, selling, general
and administrative expenses as a percentage of revenue increased to 10.8% for
the nine months ended January 31, 1997 from 10.5% for the nine months ended
January 31, 1996.
OPERATING INCOME. Excluding the $31.1 million provision, operating income
increased 44.0% to $59.4 million for the nine months ended January 31, 1997 from
$41.2 million for the nine months ended January 31,
1996. This increase was the result of the increases in revenue and gross
margin percentage, partially offset by an increase in selling, general and
administrative expenses as a percentage of revenue. Excluding the provision
relating to Merisel FAB, operating income as a percentage of total revenue
increased to 3.6% for the nine months ended January 31, 1997 from 3.1% for
the nine months ended January 31, 1996.
FINANCING EXPENSES, NET. Financing expenses, net for the nine months ended
January 31, 1997 and 1996 primarily represents interest incurred on borrowings
under the Company's financing agreement with IBMCC. During the nine months
ended January 31, 1997 financing expenses, net also includes discounts and net
expenses totaling $0.9 million associated with the sales of certain trade
receivables in connection with the Company's Securitization Facility. Financing
expenses decreased 51.7% to $13.4 million for the nine months ended January 31,
1997 from $27.8 million for the nine months ended January 31, 1996 due to lower
average borrowings and lower interest rates. The decline in borrowings which
resulted in lower financing expenses was the result of improved cash flow from
increased profitability combined with the issuance of 6 3/4% Convertible
Subordinated Debentures (the "Debentures").
TAXES. The effective tax rates for the nine months ended January 31, 1997
and 1996 of 36% and 37%, respectively, were 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 reducing the Company's overall
interest costs. Distributions on Convertible Preferred Securities accrue at
an annual rate of 6 3/4% 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, net of tax" in the Consolidated
Statements of Income (see note 3 of Notes to Consolidated Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended January 31, 1997, the Company utilized cash
generated from operations, including sales of certain of its trade receivables
and the proceeds from the issuance of the Debentures to fund its revenue growth,
working capital requirements, payments on its long term debt, and purchases of
businesses and capital equipment.
In October, 1996, the Trust sold 4,025,000 Convertible Preferred Securities
at $50 per security. The holders of the Convertible Preferred Securities are
entitled to cumulative cash distributions at an annual rate of 6 3/4% of the
liquidation amount of $50 per security. The distributions are payable quarterly
in arrears in the aggregate amount of approximately $3.4 million per quarter.
The aggregate net proceeds to the Company totaled $194.5 million after selling
expenses, discounts and commissions. The Company used the net proceeds of the
offering to reduce its outstanding indebtedness to IBMCC.
Effective December 20, 1996, the Company established the Securitization
Facility, providing the Company with up to $175 million in available credit.
The Company immediately entered into an agreement pursuant to which it sold a
percentage ownership interest in a defined pool of the Company's trade
receivables. As of January 31, 1997, the proceeds of the sales totaled $175
million, the majority of which was used to repay a majority of the Company's
indebtedness to IBMCC.
Exclusive of the proceeds of sales of trade receivables, the Company's
operating activities used cash of $34.9 million for the nine months ended
January 31, 1997 as a result of significant decreases in accounts payable and
accrued and other liabilities partially offset by decreases in inventory. The
decrease in inventory levels was a result of better inventory management and
more conservative purchasing practices. The decrease in accounts payable was
the result of significant early pay vendor discounts taken combined with
reductions in inventory purchases. The decrease in accrued and other
liabilities was primarily the result of payments made against certain
acquisition and other reserves.
During the nine months ending January 31, 1997, the Company used cash of
$44.6 million (net of cash acquired) to purchase various businesses and used
$12.8 million to make payments on certain long term obligations. During this
period, the Company also used cash of $17.0 million for capital expenditures and
plans to
make additional investments in its automated systems and its capital equipment
throughout the remainder of fiscal year 1997.
The Company currently has a $250 million line of credit under its Financing
Program Agreement with IBMCC. At January 31, 1997 the Company had $57.9 million
outstanding under this facility of which $46.2 million is included in accounts
payable and $11.7 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 January 31, 1997 amounts borrowed under the line of
credit bear interest at prime minus 0.50%. The line of credit expires October
31, 1997.
The Company believes that future cash generated from operations together
with its Financing Program Agreement and 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 December 16, 1996, the Company issued 952,491 shares of Common Stock
(95,249 of which shares have been deposited into escrow to satisfy certain
indemnification obligations) to or for the benefit of the shareholders of
Contract Data Services, Inc. ("CDS"), in connection with the merger of CDS
with and into a wholly-owned subsidiary of the Company.
On January 9, 1997, the Company issued 180,000 shares of Common Stock into
escrow for the benefit of DCT Systems, Inc., a Minnesota corporation, Niloy,
Inc., a Georgia corporation, and NCT Systems, Inc., an Illinois corporation
(collectively, "DCT"), in connection with the acquisition of certain inventory
and equipment from DCT. Those shares will be released from escrow pursuant to a
specified schedule, subject to the satisfaction of certain conditions described
in a Servicing and Marketing Agreement between the Company and DCT. DCT also
received an advance payment of $4 million in cash as additional consideration
for the transferred assets, pending subsequent determination of the value of
such assets.
The transactions described above were unrelated, private transactions
effected in reliance upon the exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Act") contained in Section 4(2) of
the Act and/or Regulation D promulgated under the Act. The shares of Common
Stock issued in each transaction were sold to a limited number of purchasers,
such purchasers were provided with access to all relevant information regarding
the Company and/or represented to the Company that they were "accredited
investors", as defined under the Act. In addition, each of the purchasers
represented to the Company that the shares were purchased for investment
purposes only and with no view toward distribution.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit
No. Description
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10.1 Stock Option/Stock Issuance Plan, as amended (incorporated
herein by reference to Exhibit 10.25 filed with the
Registration Statement on Form S-1 (Reg. Nos. 333-16307 and
333-16307-01) filed by the Registrant and Vanstar Financing
Trust, as declared effective by the Commission on January 15,
1997)
10.2 Amendment No. 6 to Second Amended and Restated Financing
Program Agreement, dated December 20, 1996, between the
Registrant and IBM Credit Corporation (1) (incorporated by
reference to Exhibit 10.3)
10.3 Receivables Purchase Agreement, dated as of December 20, 1996,
among Vanstar Finance Co., as Seller, the Registrant, as
Servicer, Pooled Accounts Receivable Capital Corporation, as
Purchaser, and Nesbitt Burns Securities, Inc., as Agent (1)
(incorporated by reference to Exhibit 10.1)
10.4 Purchase and Contribution Agreement, dated as of December 20,
1996, between the Registrant and Vanstar Finance Co. (1)
(incorporated by reference to Exhibit 10.2)
10.5 Intercreditor Agreement, dated as of December 20, 1996, among
PAR Accounts Receivable Capital Corporation, the Registrant,
Vanstar Finance Co. and Nesbitt Burns Securities, Inc. (1)
(incorporated by reference to Exhibit 10.4)
11.1* Computation of Per Share Earnings
27* Financial Data Schedule
* Filed herewith
(1) Incorporated herein 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
During the quarter ended January 31, 1997, the Company filed a Current
Report on Form 8-K dated December 26, 1996, reporting the following: (i)
under "Item 2. Acquisition or Disposition of Assets," the consummation of
the Securitization Facility with PAR and the sale by the Company, through a
wholly owned subsidiary, of an undivided interest in certain covered
accounts receivable to PAR (the "Sale"), and (ii) under "Item 5. Other
Events," a press release covering the Securitization Facility and the Sale.
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: March 13, 1997 By: /s/ JEFFREY S. RUBIN
---------------- ------------------------------
Jeffrey S. Rubin,
Vice Chairman, Chief Financial
Officer and Director