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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
October 31, 1997
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
VANSTAR CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 94-2376431
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1100 Abernathy Road, Building 500, Suite 1200
Atlanta, Georgia 30328
(Address of Principal Executive Offices)
(770) 522-4700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the Registrant's Common Stock, par
value $.001 per share, was 43,279,242 on December 9, 1997.
Page 1 of 19
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VANSTAR CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Page
------
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1997 and
April 30, 1997 3
Consolidated Statements of Income for the Three and Six
Months Ended October 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows for the Six
Months Ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
OCTOBER 31, APRIL 30,
1997 1997
----------- ---------
ASSETS (unaudited)
Current assets:
Cash $ 9,943 $ 5,686
Receivables, net of allowance for doubtful accounts of
$6,739 at October 31, 1997 and $8,610 at April 30, 1997 279,217 180,225
Inventories 461,763 389,592
Deferred income taxes 7,544 14,855
Prepaid expenses and other current assets 18,760 8,618
-------- --------
Total current assets 777,227 598,976
Property and equipment, net 45,246 39,240
Other assets, net 71,299 63,775
Goodwill, net of accumulated amortization of $7,561 at October 31,
1997 and $5,640 at April 30, 1997 105,214 56,652
======== ========
$998,986 $758,643
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $340,165 $255,147
Accrued liabilities 32,143 34,392
Deferred revenue 28,447 21,821
Short-term borrowings 210,622 74,402
Current maturities of long-term debt 4,089 4,785
-------- --------
Total current liabilities 615,466 390,547
Long-term debt, less current maturities 3,762 5,946
Other long-term liabilities 1,376 661
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,562 194,518
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,271,977 shares issued and outstanding at October 31, 1997,
42,896,779 shares issued and outstanding at April 30, 1997 43 43
Additional paid-in capital 129,779 125,926
Retained earnings 53,998 41,002
-------- --------
Total stockholders' equity 183,820 166,971
-------- --------
$998,986 $758,643
======== ========
See accompanying notes to consolidated financial statements
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VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
----------------------- ---------------------------
1997 1996 1997 1996
--------- ---------- ----------- ------------
Revenue:
Product $ 624,899 $ 463,057 $ 1,206,148 $ 953,122
Services 116,850 80,676 216,235 149,701
--------- --------- ----------- -----------
Total revenue 741,749 543,733 1,422,383 1,102,823
--------- --------- ----------- -----------
Cost of revenue:
Product 566,068 416,616 1,090,713 858,209
Services 70,027 45,836 133,438 85,211
--------- --------- ----------- -----------
Total cost of revenue 636,095 462,452 1,224,151 943,420
--------- --------- ----------- -----------
Gross margin 105,654 81,281 198,232 159,403
Selling, general and administrative expenses 79,701 59,340 153,159 116,237
--------- --------- ----------- -----------
OPERATING INCOME 25,953 21,941 45,073 43,166
Interest income 336 894 740 1,776
Financing expense, net (8,277) (4,253) (14,069) (10,864)
--------- --------- ----------- -----------
Income from operations before income taxes
and distributions on preferred securities
of Trust 18,012 18,582 31,744 34,078
Income tax provision (6,484) (6,875) (11,428) (12,609)
--------- --------- ----------- -----------
Income from operations before distributions
on preferred securities of Trust 11,528 11,707 20,316 21,469
Distributions on convertible preferred
securities of Trust, net of income taxes (2,228) (629) (4,456) (629)
--------- --------- ----------- -----------
NET INCOME $ 9,300 $ 11,078 $ 15,860 $ 20,840
========= ========= =========== ===========
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE $ .21 $ .26 $ .36 $ .49
========= ========= =========== ===========
Shares used in per share calculation 44,530 42,805 44,288 42,440
========= ========= =========== ===========
See accompanying notes to consolidated financial statements
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VANSTAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------- ---------- -------- -----------
Balance at April 30, 1997 42,897 $ 43 $125,926 $ 41,002 $ 166,971
Net income - - - 15,860 15,860
Issuance of Common Stock:
Employee stock purchase plan 190 - 2,296 - 2,296
Exercise of stock options,
including tax benefit 185 - 1,557 - 1,557
Unrealized holding loss on
Available-for-sale securities - - - (2,864) (2,864)
====== ====== ======== ======== =========
Balance at October 31, 1997 43,272 $ 43 $129,779 $ 53,998 $ 183,820
====== ====== ======== ======== =========
See accompanying notes to consolidated financial statements
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VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
SIX MONTHS ENDED
OCTOBER 31,
------------------------
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Net income $ 15,860 $ 20,840
Adjustments:
Depreciation and amortization 11,177 7,821
Deferred income taxes 8,920 12,239
Change in provision for doubtful accounts (1,891) (2,707)
Changes in operating assets and liabilities:
Receivables (81,298) 25,002
Inventories (59,463) (24,114)
Prepaid expenses and other assets (16,912) (4,033)
Accounts payable 47,596 (13,682)
Accrued and other liabilities (5,309) (5,919)
--------- ---------
Total adjustments (97,180) (5,393)
--------- ---------
Net cash provided by (used in) operating activities (81,320) 15,447
Cash Flows from Investing Activities:
Capital expenditures (13,967) (7,159)
Proceeds from sale of building - 3,125
Purchase of business, net of cash acquired (32,486) (35,633)
--------- ---------
Net cash used in investing activities (46,453) (39,667)
Cash Flows from Financing Activities:
Payments on long-term debt (7,367) (3,264)
Borrowings (repayments) under line of credit, net 136,220 (173,581)
Proceeds from issuance of convertible preferred securities
of Trust, net - 194,561
Issuance of common stock 3,177 4,096
--------- ---------
Net cash provided by (used in) financing activities 132,030 21,812
--------- ---------
Net Increase (decrease) in Cash 4,257 (2,408)
Cash at beginning of the period 5,686 14,498
--------- ---------
Cash at End of the Period $ 9,943 $ 12,090
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 7,078 $ 13,009
========= =========
Discounts and net expenses on receivables securitization $ 5,860 $ -
========= =========
Distributions on preferred securities of Trust $ 6,792 $ -
========= =========
Income taxes, net of refunds $ 4,942 $ 1,611
========= =========
See accompanying notes to consolidated financial statements
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VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(Continued)
SIX MONTHS ENDED
OCTOBER 31,
---------------------------------
1997 1996
---------------- -------------
Supplemental disclosure of noncash investing and financing
activities:
Dataflex Regions purchase:
Fair value of assets purchased $ 46,583
Cash paid, net of cash received (35,547)
=============
Liabilities assumed $ 11,036
=============
Mentor Technologies purchase:
Fair value of assets purchased $ 3,315
Cash paid, net of cash received (86)
=============
Liabilities assumed $ 3,229
=============
Sysorex purchase:
Fair value of assets purchased $ 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, 1997 and October 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 results of operations for the three and
six months ended October 31, 1997 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,
1997.
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
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share ("Statement 128"), which is required to be
adopted for both interim and annual financial statements for periods ending
after December 15, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the effect of stock options which are dilutive will be excluded. The change
would have increased primary earnings per share by $0.01 for both the three and
six months ended October 31, 1997 and would have increased primary earnings per
share for the three and six months ended October 31, 1996 by $0.01 and $0.02,
respectively. The Company has not yet determined what the impact of Statement
128 will be on the calculation of fully diluted earnings per share.
2. EARNINGS PER SHARE
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).
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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 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, 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
$194.6 million (net of initial purchasers' discounts and 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 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 Convertible Preferred Securities. Considered together, the
Back-up Undertakings constitute a full and unconditional guarantee by the
Company of the Trust's obligations on 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 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
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, through a non-consolidated
wholly-owned special purpose corporation, established a revolving funding trade
receivables securitization facility (the "Securitization Facility") which
provides the Company with up to $175 million in available credit. In August
1997, the available credit under the Securitization Facility was increased to
$200 million. 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 $319.2 million at October 31, 1997, is reflected as a
reduction to receivables. The Company retains an interest in certain amounts of
the assets sold. At October 31, 1997, the amount of that retained interest
totaled $126.7 million and is included in receivables. The Company is retained
as servicer of the Pooled Receivables. Although management believes that the
servicing revenues earned will be adequate compensation for performing the
services, estimating the fair value of the servicing asset was not considered
practicable. Consequently, a servicing asset has not been recognized in the
Consolidated Balance Sheets. The gross proceeds resulting from the sale of the
percentage ownership interests in the Pooled Receivables totaled $200 million as
of October 31, 1997. 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 $5.9 million are
included in financing expenses, net on the Consolidated Statements of Income for
the six months ended October 31, 1997.
5. 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 Company's Securitization
Facility.
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6. ACQUISITIONS
On May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain assets and assumed certain liabilities of Dataflex Corporation
and of Dataflex's wholly-owned subsidiary, Dataflex Southwest Corporation. The
assets acquired and liabilities assumed comprise substantially all of the assets
and business operations previously associated with the business operations of
Dataflex known as the Dataflex Western Region and Dataflex Southwest Region (the
"Dataflex Regions"). The Dataflex Regions offered PC product distribution,
service and support in the states of Arizona, California, Colorado, Nevada, New
Mexico, and Utah. The purchase price of the Dataflex Regions, net of cash
received, was $37.7 million.
On September 4, 1996, the Company acquired Mentor Technologies, Ltd.,
an Ohio limited partnership ("Mentor Technologies") providing training and
education services in Ohio and throughout the upper mid-western United States. A
total of approximately 300,000 shares of the Company's Common Stock (having an
aggregate value on the closing date of approximately $6.0 million) were issued
in connection with this acquisition.
On December 16, 1996, the Company acquired 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. CDS provided
outsourcing of integrated information technology services, related technical
support services and procurement of computer hardware and software.
On January 9, 1997, the Company acquired inventory and equipment from
DCT Systems, Inc., a Minnesota corporation, Niloy, Inc., a Georgia corporation,
and NCT Systems, Inc., an Illinois corporation (collectively, "DCT"). The
Company purchased certain specified assets for $4.0 million. 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.
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 $46.0
million, subject to post closing adjustments, and a contingent payment of
500,000 shares of the Company's common stock based on the future financial
performance of the acquired business.
The acquisitions of the Dataflex Regions, DCT and Sysorex were
accounted for as purchases and the excess cost over the fair value of net assets
acquired for each acquisition is being amortized on a straight-line basis over a
25 year period. The acquired operations are included in the Consolidated
Statements of Income from the respective dates of acquisition.
The acquisitions of Mentor Technologies and CDS were accounted for as
pooling-of-interests business combinations. The consolidated statements of
income, cash flows, and stockholders' equity were not restated to reflect these
acquisitions due to the insignificance of the transactions. Accordingly, the
operations of these acquisitions are included in the Consolidated Statements of
Income from the respective dates of acquisition.
7. COMMITMENTS AND CONTINGENCIES
On July 3, 1997, a purported class action suit was filed against the
Company and various other parties by a Trust claiming to be a stockholder of the
Company. The Company believes that the plaintiff's allegations are without merit
and intends to defend the suit vigorously.
Various other 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes of the Company
included elsewhere in this report. 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. Among the risks and uncertainties to which the Company is
subject are the risks inherent in the Company's substantial indebtedness, the
fact that the Company has experienced significant fluctuations in revenues and
operating results, the risks associated with managing the Company's inventory
and service offerings in light of product life cycles and technological change,
the risks associated with implementing management responses to changing
technology and market conditions, the Company's relationship with its
significant customers, intense price competition in the Company's markets and
the Company's dependence upon its key vendors. As a result, the actual results
realized by the Company could differ materially from the results discussed in
the forward-looking statements made herein. Words or phrases such as "will,"
"anticipate," "expect," "believe," "intend," "estimate," "project," "plan" or
similar expressions are intended to identify forward-looking statements.
Readers are cautioned not to place undue reliance on the forward-looking
statements made in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
When compared to the results for the three and six months ended October
31, 1996, the Company's results of operations for the three and six months ended
October 31, 1997 were impacted by the following transactions. On May 24, 1996,
the Company acquired substantially all of the assets and liabilities of the
Dataflex Regions. The Dataflex Regions offered PC product distribution, service
and support in the states of Arizona, California, Colorado, Nevada, New Mexico,
and Utah. On September 4, 1996, the Company acquired Mentor Technologies, an
Ohio limited partnership providing training and educational services in Ohio and
throughout the upper mid-western United States. During October 1996, the Trust
issued 4,025,000 Convertible Preferred Securities. Those securities are
convertible into the Company's $.001 par value common stock (the "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
acquired Contract Data Services, Inc., a North Carolina corporation providing
outsourcing of integrated information technology services, related technical
support services and procurement of computer hardware and software ("CDS"). On
July 7, 1997, the Company acquired certain assets and assumed certain
liabilities of Sysorex, a government technology provider, for a purchase price
of approximately $46.0 million, subject to post-closing adjustments, and a
contingent payment of 500,000 shares of Common Stock based on the future
financial performance of the acquired business. Effective December 20, 1996, the
Company established the Securitization Facility, which provided the Company with
up to $175 million in available credit. In connection with the Securitization
Facility the Company sells, on a revolving basis through a wholly-owned
non-consolidated subsidiary, an undivided interest in the Pooled Receivables. In
August 1997, the available credit under the Securitization Facility was
increased to $200 million.
Vanstar's four primary sources of revenue are: product, life cycle
services, professional services and other services. The Company refers to the
integration of the offerings of design and consulting, acquisition and
deployment, operation and support, and enhancement and migration as "Life Cycle
Management." For larger clients, the Company can manage every phase of the Life
Cycle of its customers' PC networks. 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, principally to implement
integration projects. Life Cycle services revenue is derived primarily from
services performed for the desktop and focused on the client or user of the PC
network. These support services include desktop installation, repair and
maintenance, moves, adds and changes, extended warranty, asset management and
help desk. Professional services revenue is derived primarily from high
value-added services, including services focused on the server and communication
segments of the PC network infrastructure. Professional services revenue
includes network installation, design and consulting, and enhancement and
migration, as well as server deployment and support. Other services revenue is
derived primarily from training services and from fees earned on the
distribution services agreement with ComputerLand Corporation (formerly with
Merisel FAB, Inc.). Pursuant to that distribution services agreement, the
Company provides product distribution to franchises and affiliates of
ComputerLand Corporation ("ComputerLand"), a subsidiary of Synnex Information
Technologies, Inc. ("Synnex").
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The following table sets forth for the unaudited periods indicated, the
Company's (i) 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,
---------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
(Dollars in thousands)
REVENUE:
Product $624,899 $463,057 $1,206,148 $ 953,122
Services:
Life Cycle 65,711 42,532 121,905 81,471
Professional 42,470 27,600 77,523 49,298
Other 8,669 10,544 16,807 18,932
-------- -------- ---------- ----------
Total revenue $741,749 $543,733 $1,422,383 $1,102,823
======== ======== ========== ==========
GROSS MARGIN:
Product $ 58,831 $ 46,441 $ 115,435 $ 94,913
Services:
Life Cycle 20,023 14,548 35,890 29,033
Professional 20,791 12,273 35,483 20,690
Other 6,009 8,019 11,424 14,767
-------- -------- ---------- ----------
Total gross margin $105,654 $ 81,281 $ 198,232 $ 159,403
======== ======== ========== ==========
GROSS MARGIN PERCENTAGE:
Product 9.4% 10.0% 9.6% 10.0%
Services:
Life Cycle 30.5% 34.2% 29.4% 35.6%
Professional 49.0% 44.5% 45.8% 42.0%
Other 69.3% 76.1% 68.0% 78.0%
-------- -------- ---------- ----------
Total gross margin percentage 14.2% 14.9% 13.9% 14.5%
======== ======== ========== ==========
Selling, general and
Administrative expenses $ 79,701 $ 59,340 $ 153,159 $ 116,237
% of total revenue 10.7% 10.9% 10.8% 10.5%
Operating income $ 25,953 $ 21,941 $ 45,073 $ 43,166
% of total revenue 3.5% 4.0% 3.2% 3.9%
Three Months Ended October 31, 1997 as Compared to the Three Months Ended
October 31, 1996
Product. Revenue increased 35.0% to $624.9 million for the three months
ended October 31, 1997 from $463.1 million for the three months ended October
31, 1996. This increase was a result of the Company's successful sales and
marketing efforts and increased sales resulting from the Sysorex acquisition.
Gross margin increased 26.7% to $58.8 million for the three months ended October
31, 1997 from $46.4 million for the three months ended October 31, 1996. Gross
margin percentage decreased to 9.4% for the three months ended October 31, 1997
from 10.0% for the three months ended October 31, 1996 primarily due to the
lower gross margins on sales to the federal government by the Company's Sysorex
division. Vanstar operates in a very aggressive price environment that will
continue to put pressure on gross margin received from product sales.
Life Cycle services. Revenue increased 54.5% to $65.7 million for the
three months ended October 31, 1997 from $42.5 million for the three months
ended October 31, 1996. This increase was the result of increased demand for the
Company's overall Life Cycle service offerings and increased sales as a result
of the acquisition of CDS. Gross margin increased 37.6% to $20.0 million for the
three months ended October 31, 1997 from $14.5 million for the three months
ended October 31, 1996. Gross margin percentage decreased to 30.5% for the three
months ended October 31, 1997 compared with 34.2% for the three months ended
October 31, 1996. The Company continues to improve the processes of its enhanced
service delivery model. The Company anticipates productivity improvements from
these efforts in future quarters.
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Professional services. Revenue increased 53.9% to $42.5 million for the
three months ended October 31, 1997 from $27.6 million for the three months
ended October 31, 1996. This increase was a result of increased demand for the
Company's higher-end consulting, design and project management services, as well
as higher rates charged for those 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. Gross margin increased 69.4% to $20.8 million for the
three months ended October 31, 1997 from $12.3 million for the three months
ended October 31, 1996. Gross margin percentage increased to 49.0% for the three
months ended October 31, 1997 from 44.5% for the three months ended October 31,
1996. The increase in gross margin percentage resulted from higher utilization
rates, as well as higher rates charged for professional services, which were
partially offset by higher labor costs.
Other services. Revenue decreased 17.8% to $8.7 million for the three
months ended October 31, 1997 from $10.5 million for the three months ended
October 31, 1996 primarily due to a 30.5 % decrease in the fees earned on the
distribution agreement with Synnex's subsidiary, ComputerLand, as the Company
transitions that business to Synnex. The Company expects to complete the
transition during the third quarter. Gross margin decreased 25.1% to $6.0
million for the three months ended October 31, 1997 from $8.0 million for the
three months ended October 31, 1996. Gross margin percentage decreased to 69.3%
for the three months ended October 31, 1997 from 76.1% for the three months
ended October 31, 1996. The decline in gross margin percentage was primarily the
result of the higher contribution of training revenue to total other services
revenue. Training revenue accounted for 54.1% of the total other services
revenue for the three months ended October 31, 1997, up from 45.7% for the three
months ended October 31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 34.3% to $79.7 million for the three months
ended October 31, 1997 from $59.3 million for the three months ended October 31,
1996. Selling, general and administrative expenses as a percentage of revenue
decreased to 10.7% for the three months ended October 31, 1997 from 10.9% for
the three months ended October 31, 1996.
Operating income. Operating income increased 18.3% to $26.0 million for
the three months ended October 31, 1997 from $21.9 million for the three months
ended October 31, 1996. Operating income as a percentage of total revenue
decreased to 3.5% for the three months ended October 31, 1997 from 4.0% for the
three months ended October 31, 1996.
Financing expenses, net. Financing expenses, net for the three months
ended October 31, 1997 represents primarily interest incurred on borrowings
under the Company's financing agreement with IBM Credit Corporation ("IBMCC")
and net expenses associated with the Company's Securitization Facility (see note
4 of Notes to Consolidated Financial Statements). Financing expenses, net for
the three months ended October 31, 1996 represents primarily interest incurred
on borrowings under the Company's financing agreement with IBMCC. Financing
expenses increased 136.4% to $7.9 million for the three months ended October 31,
1997 from $3.4 million for the three months ended October 31, 1996 due to higher
average borrowings to fund acquisitions, revenue growth and increase in
inventories.
Taxes. The effective tax rates for the three months ended October 31,
1997 and 1996 of 36% and 37%, respectively, were different than the U.S.
statutory rate of 35% primarily due to state tax provisions. At October 31, 1997
and April 30, 1997, the Company has recorded net deferred tax assets of $7.5
million and $14.9 million, respectively. The full realization of the deferred
tax assets carried at October 31, 1997 is dependent upon the Company achieving
sufficient future pretax earnings prior to the expiration of the net operating
loss carryforwards. The net operating loss carryforwards expire in the years
2000 through 2010. Although realization is not assured, management believes that
sufficient taxable 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).
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Six Months Ended October 31, 1997 as Compared to the Six Months Ended October
31, 1996
Product. Revenue increased 26.5% to $1,206.1 million for the six months
ended October 31, 1997 from $953.1 million for the six months ended October 31,
1996. This increase was a result of the Company's successful sales and marketing
efforts and increased sales resulting from the Sysorex acquisition. Gross margin
increased 21.6% to $115.4 million for the six months ended October 31, 1997 from
$94.9 million for the six months ended October 31, 1996. Gross margin percentage
decreased to 9.6% for the six months ended October 31, 1997 from 10.0% for the
six months ended October 31, 1996 primarily due to the lower gross margins on
sales to the federal government by the Company's Sysorex division. Vanstar
operates in a very aggressive price environment that will continue to put
pressure on gross margin received from product sales.
Life Cycle services. Revenue increased 49.6% to $121.9 million for the
six months ended October 31, 1997 from $81.5 million for the six months ended
October 31, 1996. This increase was the result of increased demand for the
Company's overall Life Cycle service offerings and increased sales as a result
of the acquisition of CDS. Gross margin increased 23.6% to $35.9 million for the
six months ended October 31, 1997 from $29.0 million for the six months ended
October 31, 1996. Gross margin percentage decreased to 29.4% for the six months
ended October 31, 1997 compared with 35.6% for the six months ended October 31,
1996. The Company continues to improve the processes of its enhanced service
delivery. The Company anticipates productivity improvements from these efforts
in future quarters.
Professional services. Revenue increased 57.3% to $77.5 million for the
six months ended October 31, 1997 from $49.3 million for the six months ended
October 31, 1996. This increase was a result of increased demand for the
Company's higher-end consulting, design and project management services, as well
as higher rates charged for those 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. Gross margin increased 71.5% to $35.5 million for the
six months ended October 31, 1997 from $20.7 million for the six months ended
October 31, 1996. Gross margin percentage increased to 45.8% for the six months
ended October 31, 1997 from 42.0% for the six months ended October 31, 1996. The
increase in gross margin percentage resulted from higher utilization rates, as
well as higher rates charged for professional services, which were partially
offset by higher labor costs.
Other services. Revenue decreased 11.2% to $16.8 million for the six
months ended October 31, 1997 from $18.9 million for the six months ended
October 31, 1996 primarily due to a decrease in the fees earned on the
distribution agreement with Synnex's subsidiary, ComputerLand, as the Company
transitions that business to Synnex. The Company expects to complete the
transition during the third quarter. Gross margin decreased 22.6% to $11.4
million for the six months ended October 31, 1997 from $14.8 million for the six
months ended October 31, 1996. Gross margin percentage decreased to 68.0% for
the six months ended October 31, 1997 from 78.0% for the six months ended
October 31, 1996. The decline in gross margin percentage was primarily the
result of the higher contribution of training revenue to total other services
revenue. Training revenue accounted for 52.3% of the total other services
revenue for the six months ended October 31, 1997, up from 39.5% for the six
months ended October 31, 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 31.8% to $153.2 million for the six months
ended October 31, 1997 from $116.2 million for the six months ended October 31,
1996. Selling, general and administrative expenses as a percentage of revenue
increased to 10.8% for the six months ended October 31, 1997 from 10.5% for the
six months ended October 31, 1996.
Operating income. Operating income decreased 4.4% to $45.1 million for
the six months ended October 31, 1997 from $43.2 million for the six months
ended October 31, 1996. Operating income as a percentage of total revenue
decreased to 3.2% for the six months ended October 31, 1997 from 3.9% for the
six months ended October 31, 1996.
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15
Financing expenses, net. Financing expenses, net for the six months ended
October 31, 1997 represents primarily interest incurred on borrowings under the
Company's financing agreement with IBMCC and net expenses associated with the
Company's Securitization Facility. Financing expenses, net for the six months
ended October 31, 1996 represents primarily interest incurred on borrowings
under the Company's financing agreement with IBMCC. Financing expenses increased
46.7% to $13.3 million for the six months ended October 31, 1997 from $9.1
million for the six months ended October 31, 1996 due to higher average
borrowings to fund acquisitions, revenue growth and increase in inventories.
Taxes. The effective tax rates for the six months ended October 31, 1997
and 1996 of 36% and 37%, respectively, were different than the U.S. statutory
rate of 35% primarily due to state tax provisions. At October 31, 1997 and April
30, 1997, the Company has recorded net deferred tax assets of $7.5 million and
$14.9 million, respectively. The full realization of the deferred tax assets
carried at October 31, 1997 is dependent upon the Company achieving sufficient
future pretax earnings prior to the expiration of the net operating loss
carryforwards. The net operating loss carryforwards expire in the years 2000
through 2010. Although realization is not assured, management believes that
sufficient taxable 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).
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16
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended October 31, 1997, the Company utilized cash
generated from operations, including sales of certain of its trade receivables,
to fund its revenue growth, working capital requirements, payments on its
long-term debt and purchases of businesses and capital equipment.
Effective December 20, 1996, the Company established the Securitization
Facility, providing the Company with up to $175 million in available credit. In
August 1997, the available credit under the Securitization Facility was
increased to $200 million. Pursuant to the Securitization Facility, the Company,
through a wholly-owned subsidiary, sells an undivided percentage ownership
interest in the Pooled Receivables. As of October 31, 1997, the proceeds of the
sales totaled $200 million.
The Company's operating activities used cash of $81.3 million for the six
months ended October 31, 1997 as a result of increases in accounts receivable
and inventories offset by increases in accounts payable. The increase in
accounts receivable was a result of increased sales. The increase in inventory
and accounts payable was a result of large buy-ins from computer manufacturers.
During the six months ended October 31, 1997, the Company used cash of
$32.5 million (net of cash acquired) to purchase Sysorex and used $7.4 million
to make payments on certain long-term obligations. During this period, the
Company also used cash of $14.0 million for capital expenditures. The Company
plans to make additional investments in its automated systems and its capital
equipment throughout the remainder of fiscal year 1998.
The Company currently has a $350 million line of credit under its
Financing Program Agreement with IBMCC. At October 31, 1997 the Company had
$337.4 million outstanding under that facility, of which $126.8 million is
included in accounts payable and $210.6 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, 1997 amounts
borrowed under the line of credit bear interest at a rate, generally equal to
the London Interbank Offered Rate plus 1.60%. The line of credit expires October
31, 1998.
The Company believes that future cash generated from operations, together
with cash available through its Financing Program Agreement with IBMCC and from
the Securitization Facility, will be sufficient to meet its cash requirements
through at least fiscal year 1998.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Stockholders was held on September
12, 1997. Two items of business were acted upon at the meeting: (1) the election
of ten directors to serve until the next Annual Meeting of Stockholders and
until their successors are duly elected and qualified; and (2) ratification of
the appointment of Ernst & Young, LLP as independent auditors for the Company
for the fiscal year ending April 30, 1998.
The results of the voting for the election of directors were as
follows:
NOMINEE VOTES FOR VOTES WITHHELD ABSTENTIONS BROKER NONVOTES
------- ---------- -------------- ----------- ---------------
Jay S. Amato 39,314,370 68,737 0 0
John W. Amerman 39,311,720 71,387 0 0
Richard H. Bard 39,317,867 65,240 0 0
Stephen W. Fillo 39,003,070 380,037 0 0
Stewart K.P. Gross 39,308,616 74,491 0 0
William H. Janeway 39,314,416 68,691 0 0
John R. Oltman 39,314,220 68,887 0 0
William Y. Tauscher 39,317,080 66,027 0 0
John L. Vogelstein 39,314,816 68,291 0 0
Josh S. Weston 39,314,866 68,241 0 0
Accordingly, each of the ten nominees received a plurality of the votes
cast and was elected.
The results of the voting on the ratification of the appointment of
Ernst & Young, LLP as independent auditors were as follows:
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NONVOTES
--------- ------------- ----------- ---------------
39,309,139 29,364 44,604 0
Accordingly, the number of shares voted for the proposal constituted a
majority of the shares present at the meeting, and the appointment of Ernst &
Young, LLP as independent auditors was ratified.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit
No. Description
------- -----------
10.1* Amendment No. 7 to Second Amended and Restated Financing
Program Agreement, dated October 31, 1997, between the
Registrant and IBM Credit Corporation.
11.1* Computation of Per Share Earnings
27* Financial Data Schedule (for SEC use only).
* Filed herewith
B. REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarter ended October 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANSTAR CORPORATION
Dated: December 15, 1997 By: /s/ Kauko Aronaho
-----------------------------------
Name: Kauko Aronaho
Title: Senior Vice President and Chief
Financial Officer
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