1
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, 1998
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 43,265,057 on March 2, 1998.
Page 1 of 18
2
VANSTAR CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page
-----
Item 1. Financial Statements
Consolidated Balance Sheets as of January 31, 1998 and
April 30, 1997 3
Consolidated Statements of Income for the Three and Nine
Months Ended January 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows for the Nine
Months Ended January 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JANUARY 31, APRIL 30,
1998 1997
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash $ 25,279 $ 5,686
Receivables, net of allowance for doubtful accounts of
$5,224 at January 31, 1998 and $8,253 at April 30, 1997 281,069 183,005
Inventories 515,141 389,592
Deferred income taxes 13,149 14,855
Prepaid expenses and other current assets 15,798 8,618
---------- --------
Total current assets 850,436 601,756
Property and equipment, net 49,903 39,240
Other assets, net 74,965 63,775
Goodwill, net of accumulated amortization of $8,837 at January 31,
1998 and $5,640 at April 30, 1997 103,947 56,652
========== ========
$1,079,251 $761,423
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 233,348 $255,147
Accrued liabilities 50,536 34,392
Deferred revenue 25,697 24,601
Short-term borrowings 373,754 74,402
Current maturities of long-term debt 3,744 4,785
---------- --------
Total current liabilities 687,079 393,327
Long-term debt, less current maturities 2,657 5,946
Other long-term liabilities 745 661
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,586 194,518
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,242,667 shares issued and outstanding at January 31, 1998,
42,896,779 shares issued and outstanding at April 30, 1997 43 43
Additional paid-in capital 129,939 125,926
Retained earnings 64,202 41,002
---------- --------
Total stockholders' equity 194,184 166,971
========== ========
$1,079,251 $761,423
========== ========
See accompanying notes to consolidated financial statements
3
4
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
------------------------ -------------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
Revenue:
Product $ 575,606 $ 438,587 $ 1,781,754 $ 1,391,709
Services 127,758 88,955 343,993 238,656
--------- --------- ----------- -----------
Total revenue 703,364 527,542 2,125,747 1,630,365
--------- --------- ----------- -----------
Cost of revenue:
Product 519,445 395,093 1,610,158 1,253,302
Services 77,413 55,781 210,851 140,992
--------- --------- ----------- -----------
Total cost of revenue 596,858 450,874 1,821,009 1,394,294
--------- --------- ----------- -----------
Gross margin 106,506 76,668 304,738 236,071
Selling, general and administrative expenses 77,862 60,489 231,021 176,726
--------- --------- ----------- -----------
OPERATING INCOME 28,644 16,179 73,717 59,345
Interest income 371 1,155 1,111 2,931
Financing expense, net (9,194) (2,542) (23,263) (13,406)
--------- --------- ----------- -----------
Income from operations before income taxes
and distributions on preferred securities
of Trust 19,821 14,792 51,565 48,870
Income tax provision (7,136) (4,984) (18,564) (17,593)
--------- --------- ----------- -----------
Income from operations before distributions
on preferred securities of Trust 12,685 9,808 33,001 31,277
Distributions on convertible preferred
securities of Trust, net of income taxes (2,228) (2,287) (6,684) (2,916)
--------- --------- ----------- -----------
NET INCOME $ 10,457 $ 7,521 $ 26,317 $ 28,361
========= ========= =========== ===========
BASIC EARNINGS PER SHARE $ 0.24 $ 0.18 $ 0.61 $ 0.69
========= ========= =========== ===========
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.17 $ 0.59 $ 0.65
========= ========= =========== ===========
Shares used for basic per share calculation 43,252 42,499 43,108 41,328
========= ========= =========== ===========
Shares used for diluted per share calculation 44,403 44,234 44,326 43,393
========= ========= =========== ===========
See accompanying notes to consolidated financial statements
4
5
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 -- -- -- 26,317 26,317
Issuance of Common Stock:
Employee stock purchase plan 190 2,301 -- 2,301
Exercise of stock options,
including tax benefit 204 1,712 -- 1,712
Return of common stock from
escrow related to business
acquisitions (48) -- --
Accumulated translation adjustment -- -- -- (119) (119)
Unrealized holding loss on
available-for-sale securities -- -- -- (2,998) (2,998)
-------- ------ -------- -------- ---------
Balance at January 31, 1998 43,243 $ 43 $129,939 $ 64,202 $ 194,184
======== ====== ======== ======== =========
See accompanying notes to consolidated financial statements
5
6
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
NINE MONTHS ENDED
JANUARY 31,
-----------------------------
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net income $ 26,317 $ 28,361
Adjustments:
Depreciation and amortization 17,266 12,429
Deferred income taxes 3,391 15,953
Change in provision for doubtful accounts (3,048) (7,790)
Changes in operating assets and liabilities:
Receivables (79,213) 171,647
Inventories (112,841) 39,411
Prepaid expenses and other assets (15,870) (5,645)
Accounts payable (59,197) (97,756)
Accrued and other liabilities 6,974 (16,569)
--------- ---------
Total adjustments (242,538) 111,680
--------- ---------
Net cash (used in) provided by operating activities (216,221) 140,041
Cash Flows from Investing Activities:
Capital expenditures (23,712) (16,991)
Proceeds from sale of building - 3,125
Purchase of business, net of cash acquired (34,164) (44,585)
--------- ---------
Net cash used in investing activities (57,876) (58,451)
Cash Flows from Financing Activities:
Payments on long-term debt (8,939) (12,806)
Borrowings (repayments) under line of credit, net 299,352 (277,488)
Proceeds from issuance of convertible preferred securities
of Trust, net - 194,433
Issuance of common stock 3,277 4,728
--------- ---------
Net cash provided by (used in) financing activities 293,690 (91,133)
--------- ---------
Net Increase (decrease) in Cash 19,593 (9,543)
Cash at beginning of the period 5,686 14,498
--------- ---------
Cash at end of the period $ 25,279 $ 4,955
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 12,403 $ 16,331
========= =========
Discounts and net expenses on receivables securitization $ 9,033 $ 1,401
========= =========
Distributions on preferred securities of Trust $ 10,188 $ 3,434
========= =========
Income taxes, net of refunds $ 5,167 $ 3,297
========= =========
See accompanying notes to consolidated financial statements
6
7
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(Continued)
NINE MONTHS ENDED
JANUARY 31,
--------------------------
1998 1997
------- --------
Supplemental disclosure of noncash investing and financing
activities:
Dataflex Regions purchase:
Fair value of assets acquired $ 46,889
Cash paid, net of cash received (36,726)
--------
Liabilities assumed $ 10,163
========
Mentor Technologies pooling:
Fair value of assets acquired $ 3,315
Cash paid, net of cash received (86)
--------
Liabilities assumed $ 3,229
========
CDS pooling:
Fair value of assets acquired $ 15,500
Cash paid, net of cash received 801
--------
Liabilities assumed $ 16,301
========
Sysorex purchase:
Fair value of assets acquired $ 85,448
Cash paid, net of cash received (32,486)
--------
Liabilities assumed $ 52,962
========
See accompanying notes to consolidated financial statements
7
8
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 nine months ended January 31, 1998 and January 31,
1997 are unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and Securities and
Exchange Commission regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
for a fair presentation of the financial position, results of operations,
stockholders' equity and cash flows for the interim periods. The results of
operations for the three and nine months ended January 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1997. Certain prior period amounts have
been reclassified to conform to current presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. EARNINGS PER SHARE
Effective for the quarter ended January 31, 1998, the Company adopted
Financial Accounting Standards Board Statement No. 128, Earnings per Share
("Statement 128"). Under Statement 128, Basic earnings per share are computed
using the weighted average number of shares of Common Stock during the period
and Diluted earnings per share are computed using the weighted average number of
shares of Common Stock and dilutive Common Stock equivalents outstanding during
the period. Common Stock equivalents are computed for the Company's outstanding
options using the treasury stock method. The Company restated all prior periods
to reflect the change in method required by Statement 128.
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") of 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 $.001 common stock (the "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
$194.4 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.
8
9
The Trust invested the proceeds of the offering in 6 3/4% Convertible
Subordinated Debentures due 2016 (the "Debentures") issued by the Company. The
Debentures bear interest at 6 3/4% per annum generally payable quarterly on
January 1, April 1, July 1 and October 1. The Debentures are redeemable by the
Company, in whole or in part, on or after October 5, 1999 at designated
redemption prices. If the Company redeems the Debentures, the Trust must redeem
on a pro rata basis Convertible Preferred Securities having an aggregate
liquidation value equal to the aggregate principal amount of the Debentures
redeemed. The sole asset of the Trust is $207.5 million aggregate principal
amount of the Debentures. The Debentures and related income statement effects
are eliminated in the Company's consolidated financial statements.
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
provided 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 $299.6 million at January 31, 1998, is reflected as a
reduction to receivables. The Company retains an interest in certain amounts of
the assets sold. At January 31, 1998, the amount of that retained interest
totaled $108.2 million and is included in receivables. The Company is retained
as servicer of the Pooled Receivables. Although management believes that the
servicing revenues earned will be adequate compensation for performing the
services, estimating the fair value of the servicing asset was not considered
practicable. Consequently, a servicing asset has not been 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 January 31, 1998. Such proceeds are included in cash flows from operating
activities in the Consolidated Statements of Cash Flows. Discounts and net
expenses associated with the sales of the receivables totaling $9.0 million are
included in financing expenses, net on the Consolidated Statements of Income for
the nine months ended January 31, 1998.
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 Securitization Facility.
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 299,965 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 that acquisition.
9
10
On December 16, 1996, the Company acquired Contract Data Services,
Inc., a North Carolina corporation ("CDS"), in exchange for 904,866 shares of
the Company's Common Stock (having an aggregate value on the closing date of
approximately $20.8 million). CDS provided outsourcing of integrated information
technology services, related technical support services and procurement of
computer hardware and software.
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, the
asset purchase agreement provided that DCT could receive a maximum of 180,000
shares of the Company's Common Stock upon the satisfaction of certain
conditions. In February 1998, 120,000 of those shares were released to DCT. The
Company also entered into a servicing and marketing agreement on January 9, 1997
whereby the Company will provide certain computer products and billing services
to DCT. Based upon certain criteria under the servicing and marketing agreement,
DCT also may receive, at DCT's election, cash or up to 40,000 additional
restricted shares of the 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 those
acquisitions due to the insignificance of the transactions. Accordingly, the
operations of those 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 under
California law against the Company and various other parties by a trust claiming
to be a stockholder of the Company. On January 21, 1998, a suit with virtually
identical allegations was filed under Federal law by the same plaintiff and
another plaintiff claiming to be a stockholder of the Company. The Company
believes that the plaintiffs' allegations are without merit and intends to
defend the suits 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.
10
11
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," "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 nine months ended January
31, 1997, the Company's results of operations for the three and nine months
ended January 31, 1998 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 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 CDS, a North Carolina
corporation providing outsourcing of integrated information technology services,
related technical support services and procurement of computer hardware and
software. 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 has
been 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 provided product distribution to franchises and affiliates of
ComputerLand Corporation ("ComputerLand"), a subsidiary of Synnex Information
Technologies, Inc. ("Synnex") through January 1998.
11
12
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 Nine Months Ended
January 31, January 31,
-------------------- -------------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(Dollars in thousands)
REVENUE:
Product $575,606 $438,587 $1,781,754 $1,391,709
Services:
Life Cycle 72,889 47,944 194,794 129,415
Professional 43,195 30,555 120,718 79,853
Other 11,674 10,456 28,481 29,388
-------- -------- ---------- ----------
Total revenue $703,364 $527,542 $2,125,747 $1,630,365
======== ======== ========== ==========
GROSS MARGIN:
Product $ 56,161 $ 43,494 $ 171,596 $ 138,407
Services:
Life Cycle 24,882 16,762 60,772 45,795
Professional 18,353 9,995 53,836 30,685
Other 7,110 6,417 18,534 21,184
-------- -------- ---------- ----------
Total gross margin $106,506 $ 76,668 $ 304,738 $ 236,071
======== ======== ========== ==========
GROSS MARGIN PERCENTAGE:
Product 9.8% 9.9% 9.6% 9.9%
Services:
Life Cycle 34.1% 35.0% 31.2% 35.4%
Professional 42.5% 32.7% 44.6% 38.4%
Other 60.9% 61.4% 65.1% 72.1%
-------- -------- ---------- ----------
Total gross margin percentage 15.1% 14.5% 14.3% 14.5%
======== ======== ========== ==========
Selling, general and
Administrative expenses $ 77,862 $ 60,489 $ 231,021 $ 176,726
% of total revenue 11.1% 11.5% 10.9% 10.8%
Operating income $ 28,644 $ 16,179 $ 73,717 $ 59,345
% of total revenue 4.1% 3.1% 3.5% 3.6%
Three Months Ended January 31, 1998 as Compared to the Three Months Ended
January 31, 1997
Product. Revenue increased 31.2% to $575.6 million for the three months
ended January 31, 1998 from $438.6 million for the three months ended January
31, 1997. 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 29.1% to $56.2 million for the three months ended January
31, 1998 from $43.5 million for the three months ended January 31, 1997. Gross
margin percentage decreased slightly from 9.9% for the three months ended
January 31, 1997 to 9.8% for the three months ended January 31, 1998. Vanstar
operates in a very aggressive price environment that will continue to put
pressure on unit pricing and gross margin received from product sales.
Life Cycle services. Revenue increased 52.0% to $72.9 million for the
three months ended January 31, 1998 from $47.9 million for the three months
ended January 31,1997. 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 48.4% to $24.9 million for the
three months ended January 31, 1998 from $16.8 million for the three months
ended January 31, 1997. Gross margin percentage decreased to 34.1% for the three
months ended January 31, 1998 compared with 35.0% for the three months ended
January 31,1997. The Company continues to improve the processes of its enhanced
service delivery model and additional resources are being focused on training
and a high level of customer service which has caused a slight decrease in gross
margin.
12
13
Professional services. Revenue increased 41.4% to $43.2 million for the
three months ended January 31, 1998 from $30.6 million for the three months
ended January 31, 1997. 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 83.6% to $18.4 million for the
three months ended January 31, 1998 from $10.0 million for the three months
ended January 31, 1997. Gross margin percentage increased to 42.5% for the three
months ended January 31, 1998 from 32.7% for the three months ended January 31,
1997. The increase in gross margin percentage primarily 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 increased 11.6% to $11.7 million for the three
months ended January 31, 1998 from $10.5 million for the three months ended
January 31, 1997, primarily due to the sale of the classroom instruction portion
of the Education Services business, which was partially offset by a decrease in
the fees earned on the distribution agreement with Synnex's subsidiary,
ComputerLand. The Company completed its obligation under that agreement in
January 1998. Gross margin increased 10.8% to $7.1 million for the three months
ended January 31, 1998 from $6.4 million for the three months ended January 31,
1997, primarily due to the gain on the sale of the classroom instruction portion
of the Education Services business partially offset by the decrease in fees on
the distribution agreement. The net gain on the sale was approximately $1.6
million after tax, inclusive of losses related to the business. Gross margin
percentage decreased to 60.9% for the three months ended January 31, 1998 from
61.4% for the three months ended January 31, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 28.7% to $77.9 million for the three months
ended January 31, 1998 from $60.5 million for the three months ended January 31,
1997. Selling, general and administrative expenses as a percentage of revenue
decreased to 11.1% for the three months ended January 31, 1998 from 11.5% for
the three months ended January 31, 1997.
Operating income. Operating income increased 77.0% to $28.6 million for
the three months ended January 31, 1998 from $16.2 million for the three months
ended January 31, 1997. Operating income as a percentage of total revenue
increased to 4.1% for the three months ended January 31, 1998 from 3.1% for the
three months ended January 31, 1997.
Financing expenses, net. Financing expenses, net for the three months
ended January 31, 1998 represents primarily interest incurred on borrowings
under the Company's financing agreement with 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
January 31, 1997 represents interest incurred on borrowings under the Company's
financing agreement with IBMCC and net expenses associated with the Company's
Securitization Facility from December 20, 1996. Financing expenses increased to
$8.8 million for the three months ended January 31, 1998 from $1.4 million for
the three months ended January 31, 1997 due to higher average borrowings to fund
acquisitions, revenue growth and an increase in inventories.
Taxes. The effective tax rate for the three months ended January 31, 1998
of 36% was different than the U.S. statutory rate of 35% primarily due to state
tax provisions. The effective tax rate for the three months ended January 31,
1997 of 34% was different than the U.S. statutory rate of 35% primarily due to
an adjustment to the year-to-date taxes through January 31, 1997. At January 31,
1998 and April 30, 1997, the Company has recorded net deferred tax assets of
$13.1 million and $14.9 million, respectively. The full realization of the
deferred tax assets carried at January 31, 1998 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).
13
14
Nine Months Ended January 31, 1998 as Compared to the Nine Months Ended January
31, 1997
Product. Revenue increased 28.0% to $1,781.8 million for the nine months
ended January 31, 1998 from $1,391.7 million for the nine months ended January
31, 1997. 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 24.0% to $171.6 million for the nine months ended January
31, 1998 from $138.4 million for the nine months ended January 31, 1997. Gross
margin percentage decreased to 9.6% for the nine months ended January 31, 1998
from 9.9% for the nine months ended January 31, 1997 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 unit pricing and gross margin received from product
sales.
Life Cycle services. Revenue increased 50.5% to $194.8 million for the
nine months ended January 31, 1998 from $129.4 million for the nine months ended
January 31, 1997. 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 32.7% to $60.8 million for the
nine months ended January 31, 1998 from $45.8 million for the nine months ended
January 31, 1997. Gross margin percentage decreased to 31.2% for the nine months
ended January 31, 1998 compared with 35.4% for the nine months ended January 31,
1997. The Company continues to improve the processes of its enhanced service
delivery model and additional resources are being focused on training and a high
level of customer service which has caused a decrease in gross margin.
Professional services. Revenue increased 51.2% to $120.7 million for the
nine months ended January 31, 1998 from $79.9 million for the nine months ended
January 31, 1997. 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 75.4% to $53.8 million for the
nine months ended January 31, 1998 from $30.7 million for the nine months ended
January 31, 1997. Gross margin percentage increased to 44.6% for the nine months
ended January 31, 1998 from 38.4% for the nine months ended January 31, 1997.
The increase in gross margin percentage primarily 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 3.1% to $28.5 million for the nine
months ended January 31, 1998 from $29.4 million for the nine months ended
January 31, 1997 primarily due to a decrease in the fees earned on the
distribution agreement with Synnex's subsidiary, ComputerLand, partially offset
by the sale of the classroom instruction portion of the Education Services
business. The Company completed its obligation under that agreement in January
1998. Gross margin decreased 12.5% to $18.5 million for the nine months ended
January 31, 1998 from $21.2 million for the nine months ended January 31, 1997.
The net gain on the sale was approximately $1.6 million after tax, inclusive of
losses related to the business. Gross margin percentage decreased to 65.1% for
the nine months ended January 31, 1998 from 72.1% for the nine months ended
January 31, 1997. The decline in gross margin percentage was primarily the
result of the higher contribution of training-related revenue to total other
services revenue.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 30.7% to $231.0 million for the nine months
ended January 31, 1998 from $176.7 million for the nine months ended January 31,
1997. Selling, general and administrative expenses as a percentage of revenue
increased slightly to 10.9% for the nine months ended January 31, 1998 from
10.8% for the nine months ended January 31, 1997.
Operating income. Operating income increased 24.2% to $73.7 million for
the nine months ended January 31, 1998 from $59.3 million for the nine months
ended January 31, 1997. Operating income as a percentage of total revenue
decreased to 3.5% for the nine months ended January 31, 1998 from 3.6% for the
nine months ended January 31, 1997.
14
15
Financing expenses, net. Financing expenses, net for the nine months
ended January 31, 1998 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 nine
months ended January 31, 1997 represents primarily interest incurred on
borrowings under the Company's financing agreement with IBMCC. Financing
expenses increased to $22.2 million for the nine months ended January 31, 1998
from $10.5 million for the nine months ended January 31, 1997 due to higher
average borrowings to fund acquisitions, revenue growth and an increase in
inventories.
Taxes. The effective tax rate for the nine months ended January 31,
1998 and 1997 of 36% was different than the U.S. statutory rate of 35% primarily
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 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, 1998, 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 January 31, 1998, the proceeds of the
sales totaled $200 million.
The Company's operating activities used cash of $216.2 million for the
nine months ended January 31, 1998 as a result of increases in accounts
receivable and inventories and decreases in accounts payable. The increase in
accounts receivable was a result of increased sales and the increase in
inventory was a result of large buy-ins from computer manufacturers. The
decrease in accounts payable was funded through the short-term line of credit.
During the nine months ended January 31, 1998, the Company used cash of
$32.5 million (net of cash acquired) to purchase Sysorex and used $8.9 million
to make payments on certain long-term obligations. During this period, the
Company also used cash of $23.7 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 $525 million line of credit under its
Financing Program Agreement with IBMCC effective February 4, 1998. On April 1,
1998, the available line of credit is scheduled to be reduced to $350 million.
At January 31, 1998 the Company had $476.8 million outstanding under that
facility, of which $103 million is included in accounts payable and $373.8
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, 1998 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.
15
16
YEAR 2000
Many existing computer systems, including certain of the Company's internal
systems, use only the last two digits to identify years in the date field. As a
result, those systems may not accurately distinguish years in the 21st century
from years in the 20th century, or may not function properly when faced with
years later than 1999. This problem is generally referred to as the "Year 2000
Issue." Computer systems that are able to deal correctly with dates after 1999
are referred to as "Year-2000-Compliant."
With respect to its internal systems and operations, the Company is addressing
the Year 2000 Issue through a five-phase project plan. The five phases of the
plan are:
(1) Inventory and Assessment, which included compiling an inventory of hardware
and software, then assessing the effects of 21st-century dates on each
system and, in the case of systems that are not yet Year-2000-Compliant,
the risk to the Company's business if that system were not operating.
(2) Solution Planning, which generally involved organizing and planning the
task of ensuring that the Company's computer systems are
Year-2000-Compliant. This process included classifying the systems into
units ("Production Groupings") and scheduling the Production Groupings for
conversion, generally with the goal of treating the most important and
vulnerable systems first. This phase also included contacting all vendors
for the status of their software and plans for compliance.
(3) Conversion, which involves making necessary changes to render each
Production Grouping Year-2000-Compliant.
(4) Testing each Production Grouping.
(5) Implementing each Production Grouping.
The Company has completed the first two phases of the plan and has begun phase
three. In addition, some of the Company's systems are already
Year-2000-Compliant. The Company hopes to complete all five phases of the plan
early in calendar year 1999.
The Company expects to implement successfully the systems and programming
changes necessary to address the Year 2000 Issue. Moreover, the Company does not
expect the costs associated with that implementation to be material to the
Company's financial position or results of operations over the term of the
project.
The statements above describing the Company's plans and objectives for handling
the Year 2000 Issue and the expected impact of the Year 2000 Issue on the
Company are forward-looking statements. Those statements involve risks and
uncertainties that could cause actual results to differ materially from the
results discussed above. Factors that might cause such a difference include, but
are not limited to, delays in executing the plan outlined above and increased or
unforeseen costs associated with the implementation of the plan and any
necessary changes to the Company's systems. Any inability on the part of the
Company to implement necessary changes in timely fashion could have an adverse
effect on future results of operations.
16
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company previously reported the filing, in Superior Court of the
State of California, of a suit captioned David T. O'Neal Trust, Dated 4/1/77, v.
Vanstar Corporation, et al. On January 21, 1998, the same plaintiff, along with
another plaintiff claiming to have purchased shares of Common Stock, filed suit
in the United States District Court for the Northern District of California,
making allegations virtually identical to those in the earlier suit. The recent
suit is captioned David T. O'Neal Trust, Dated 4/1/77, et al. v. Vanstar
Corporation, et al., Case No. C-98-0216 MJJ. Both suits name as defendants the
Company, certain directors and officers of the Company, and the Company's
principal stockholder, Warburg Pincus Capital Co., L.P., and certain of its
affiliates. The complaints in both suits generally allege, among other things,
that the defendants made false or misleading statements or concealed information
regarding the Company and that the plaintiff, as a holder of the Common Stock,
suffered damage as a result.
The plaintiffs in both suits seek class action status and purport to
represent a class of purchasers of Common Stock between March 11, 1996 and
January 23, 1997. The complaint in the recent suit purports to state two causes
of action under the Securities Exchange Act of 1934 and seeks compensatory
damages in an unspecified amount, together with other relief. On January 28,
1998, the California Superior Court dismissed the plaintiffs' complaint in the
first suit but granted the plaintiffs leave to amend to cure the deficiencies in
their complaint. The Company believes that the plaintiff's allegations in both
suits are without merit and intends to defend the suits 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 those actions will not have a
materially adverse effect on the Company's financial position or results of
operations, taken as a whole.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit
No. Description
-------- -----------
10.1* Amendment No. 8 to Second Amended and Restated
Financing Program Agreement, dated December 11, 1997,
between the Registrant and IBM Credit Corporation.
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 January 31, 1998.
17
18
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: March 17, 1998 By: /s/ Kauko Aronaho
------------------------------------
Name: Kauko Aronaho
Title: Senior Vice President and Chief
Financial Officer
18