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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1998
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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
incorporation or organization) Identification No.)
1100 Abernathy Road, Building 500, Suite 1200
Atlanta, Georgia 30328
(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 522-4700
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.001 par value New York Stock Exchange
("Common Stock")
Securities registered pursuant to Section 12 (g) of the Act: None
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 ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on May 15, 1998 (based on the closing New York Stock Exchange sale
price on such date) was $347,942,109 using beneficial ownership rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude stock
that may be beneficially owned by directors, executive officers or 10%
stockholders, some of whom might not be held to be affiliates upon judicial
determination.
The number of outstanding shares of Common Stock of the Registrant as of May 15,
1998 was 43,500,740.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement") to be filed with the
Securities and Exchange Commission, are incorporated by reference into Part III
hereof.
Page 1 of 51
Exhibit Index begins on Page 48
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VANSTAR CORPORATION
INDEX TO FORM 10-K
Page
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PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 15
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 16
ITEM 6. SELECTED FINANCIAL DATA 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 47
ITEM 11. EXECUTIVE COMPENSATION 47
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 48
SIGNATURES 51
FORWARD-LOOKING STATEMENTS
With the exception of historical information, the matters discussed in this
Annual Report on Form 10-K include forward-looking statements. Those statements
relate to dividends; business plans, programs and trends; results of future
operations; uses of future earnings; satisfaction of future cash requirements;
funding of future growth; acquisition plans; and other matters. Words or phrases
such as "will," "hope," "expect," "intend," "plan" or similar expressions
generally are intended to identify forward-looking statements. Those statements
involve risks and uncertainties that could cause actual results to differ
materially from the results discussed herein. 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 on its key vendors. For a
discussion of these factors and others, please see "Certain Business Factors" in
Item 1 of this Annual Report on Form 10-K. Readers are cautioned not to place
undue reliance on the forward-looking statements made in, or incorporated by
reference into, this Annual Report on Form 10-K or in any document or statement
referring to this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW AND HISTORY
Vanstar Corporation ("Vanstar" or the "Company") is a leading provider
of services and products designed to build, manage and enhance personal computer
("PC") network infrastructures for Fortune 1000 companies and other large
enterprises. The Company provides customized information technology and
networking solutions for its customers by integrating value-added professional
services with its expertise in sourcing, distributing and supporting PC
hardware, network products, computer peripherals and software from many vendors.
The Company's comprehensive solutions model, called Life Cycle
Management, spans design and consulting, acquisition and deployment, operation
and support, and enhancement and migration to support the customer's PC network
infrastructure throughout its entire life cycle. Life Cycle Management comprises
three distinct business units: Professional Services, Acquisition Services and
Life Cycle Services, each of which work discretely or in combination to support
a client's IT infrastructure.
The Company's current capabilities were developed internally and
through acquisitions. These strategic acquisitions included: (i) the
acquisition, from 1990 through 1992, of 23 of the Company's franchisees,
operating in 33 major United States metropolitan markets; (ii) the 1991
acquisition of NYNEX Business Centers; (iii) the 1992 acquisition of the
Customer Services Division of TRW, Inc.; (iv) the 1996 acquisition of the
western and southwestern regions of the Dataflex Corporation; (v) the 1996
acquisition of Mentor Technologies, Ltd; (vi) the 1996 acquisition of Contract
Data Services, Inc. (then doing business as "National Technology Group") and
(vii) the 1997 acquisition of certain assets of Sysorex Information Systems,
Inc.
The Company was incorporated in September 1987 under the name
"ComputerLand Corporation" following the acquisition by William Y. Tauscher,
Warburg, Pincus Capital Company, L.P. and Richard H. Bard of the majority of the
capital stock of the Company's predecessor, IMS Associates, Inc. ("IMS"). IMS
was merged with the Company after that acquisition. At that time, the Company
operated and franchised computer retail stores in the United States.
In 1994, the Company sold its remaining United States franchise
business to Merisel FAB, Inc., a wholly-owned subsidiary of Merisel Inc.,
adopted the name Vanstar, and changed its fiscal year end from September 30 to
April 30.
INDUSTRY OVERVIEW
Information technology infrastructure has become a vital element of an
organization's long-term business strategy, and the demand for distributed
computing has grown dramatically. In recent years, PC, software, and network
technologies have become increasingly flexible, efficient and user-friendly, and
both corporations and end users are seeking the efficiencies of increased and
easier access to data and applications throughout the organization. Moreover,
the emergence of the Internet as a dominant IT platform has generated additional
pressures on the IT infrastructure as the corporate network handles
unprecedented volumes of traffic and its reach becomes virtually unlimited.
A number of market dynamics are reshaping the nature of information
technology. The pace of technology adoption and innovation has accelerated to
create a more complex, dynamic enterprise environment. The migration of mission
critical applications from the mainframe to the network has increasingly made
the network the central nervous system of the corporation, escalating the
importance of a reliable infrastructure. The need for distributed enterprise
infrastructure and support have often outpaced corporate resources and
expertise. Today's chief information officers are faced with ever-increasing
responsibility and a range of daunting challenges.
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The Company believes that many companies are realizing that they lack
the systems and expertise to effectively manage enterprise PC networks. The
Company believes that its customers require increasingly sophisticated PC
network systems and support infrastructures, yet are constrained by limited
technical personnel to design, manage and enhance those infrastructures.
Vanstar believes many corporations are eager to partner with leading
service providers to implement and support the most advanced computer
technologies in an effort to increase productivity and profitability. Vanstar
seeks to satisfy corporate infrastructure requirements while minimizing its
customers' internal staff requirements and systems development risk. Companies
are seeking the services of full-service IT solutions providers who can evaluate
their current PC networking systems, design a system that will help them meet
business goals now and in the future, and support and maintain a distributed
environment on an ongoing basis.
The Company believes that the key criteria which businesses consider
when evaluating PC network integration service providers include the provider's
ability: (i) to evaluate and define the strategic business requirements of a
corporation's information technology environment, (ii) to deliver one integrated
solution (including highly-qualified technical personnel) spanning the PC
network life cycle; (iii) to supply multi-vendor network products customized to
specific end-user demands; and (iv) to offer support and maintenance services on
a national and international basis.
THE VANSTAR SOLUTION
Vanstar provides customized, integrated solutions for the network
infrastructure needs of its customers by combining strategic consultative
services, expertise in sourcing and distributing products from a variety of
vendors, and a comprehensive suite of value-added support offerings. The Company
believes that a single source solution enables customers to use fewer vendors
while providing tighter integration, which results in lower costs, minimized
risk, greater management control and increased accountability. Vanstar has built
substantial resource depth in all service areas and offers its integrated Life
Cycle Management services on a nationwide basis.
BUSINESS STRATEGIES
The Company's objective is to capture burgeoning market opportunities
with increasing demands for higher-level consultative services while maintaining
its position as a leading provider of a complete range of PC network
infrastructure products and support services to large businesses throughout the
world. To achieve its objective, the Company believes it must:
DEVELOP AND ENHANCE VALUE-ADDED SERVICES
Vanstar continues to see significant opportunity to increase its
operating margins by increasing the range of value-added services that it
currently offers its customers. While the Company's Life Cycle Services offering
is aimed at ensuring maximum customer value and reducing Total Cost of Ownership
("TCO"), the Company sees strong future growth in value-added services in the
Professional Services market, specifically in the assessment, design and
deployment of strategic IT solutions. More consultative in nature, such services
often involve an upfront assessment of business and technology needs, and result
in the deployment of enterprise systems that integrate strategic technologies
which help to facilitate business change. Vanstar continually evaluates and
pursues opportunities to acquire technology and other resources that will
enhance and extend the reach of its value-added service offerings.
EXPAND AND LEVERAGE RELATIONSHIPS
Customers. Preserving and enhancing its relationships with its
customers is the Company's first priority. The Company's customers are often
leaders in their respective industries and have made substantial investments in
information technology in order to build their businesses successfully. Vanstar
customer engagements involve sophisticated control and measurement processes
designed to ensure customer satisfaction and long-term opportunity for Vanstar.
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Vendors and Partners. Because of its long history in product
acquisition and configuration, the Company has a significant range of strategic
alliances with industry-leading technology vendors, including Cisco Systems,
Inc. ("Cisco Systems"), Compaq Computer Corporation ("Compaq"), Computer
Associates International, Inc., Hewlett-Packard Company ("Hewlett-Packard"),
International Business Machines Corporation ("IBM") and Microsoft Corporation
("Microsoft"), and leverages these relationships for the development of total IT
solutions. Specifically, Vanstar's long-time alliance with Microsoft has
resulted in the company having one of the industry's largest team of networking
professionals dedicated to the Windows NT platform.
RECRUIT AND RETAIN HIGHLY QUALIFIED PROFESSIONALS
Attracting and retaining exceptional employees is one of the Company's
priorities. With its aggressive business strategy, Vanstar recognizes the need
to make major investments to recruit, train and retain employees who can provide
outstanding service and help the Company achieve its goals. The Company operates
in a highly competitive environment which has a limited supply of talented and
qualified individuals. Vanstar is committed to creating and maintaining a work
environment that becomes a destination for the best employees in the industry.
SERVICES AND PRODUCTS
Vanstar's entire suite of services is organized around an integrated
model called "Life Cycle Management." Life Cycle Management includes design and
consulting, acquisition and deployment, operation and support, and enhancement
and migration to support the customer's PC network infrastructure throughout its
life cycle. The Company offers each service as a discrete service or as part of
an integrated Life Cycle Management program. The Company believes that proper
planning and management are essential to providing leading information
technology products and services and to attaining customer satisfaction. Through
planning and management, the Company seeks to optimize solutions at each point
in the PC network life cycle.
BUSINESS GROUP DESCRIPTION SERVICES
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Professional Services New network infrastructure and - Design and Consulting
migration to new technologies - Enhancement and Migration
- Education Services
Life Cycle Services Day-to-day IT operations - Operation and Support
Acquisition Services Product acquisition and - Acquisition and Deployment
configuration
PROFESSIONAL SERVICES
Vanstar's Professional Services Organization ("PSO") has built a track
record in providing design, consulting, integration, deployment and migration
services for the distributed network infrastructures that maximize a client's IT
investment, while leveraging PSO's expertise in four key technical disciplines
- -scalability, security, reliability, and flexibility. The Company's unique
engagement methodology, while integrating key stages of IT assessment and
development for a seamless solution, accommodates client entry at any stage of
the engagement. This methodology helps to reduce the cost, risk, and disruption
of changing technology platforms. With a full-time staff and contractors of
approximately 1,500, PSO offers an organization of highly experienced
consultants and engineers with backgrounds ranging from management consulting to
network engineering.
PSO consists of two principal groups -- Consulting Services and
Engineering Services -- with a Program and Project Management organization
supporting both.
Consulting Services provides architecture design and planning services
organized into two sets of national consulting practices based upon areas of
expertise. Technology-based practices include Enterprise Technologies,
Enterprise Network Design, and Enterprise Systems Management.
Business-improvement-
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based practices include Management Consulting and Education Services. PSO has
integrated its networking and systems integration expertise with business
process consulting services. By carefully aligning IT strategies with clients'
business processes, PSO delivers strategic IT solutions that not only enhance
the performance of existing infrastructures, but also generate long-term
business value for its clients by boosting productivity, increasing customer
service standards, and reducing cost of ownership. One such method is the
Company's Business Technology Requirements ("BTR") session, a one-day focused
session in which Vanstar topical experts assess a customer's business processes
and opportunities with a view toward strategic technology deployment. BTR
sessions are presently offered for Windows NT, help desk, messaging, security,
network design, and enterprise management.
The Company's Education Services are also based on a consultative
methodology that assesses the customer's business environment and the skill sets
of each user to identify training needs for critical applications in each area
of the business. Using a system called Polaris, the Company uses both
traditional and innovative training methods, training facilities and certified
instructors to deliver the appropriate training for each student. Vanstar is a
Microsoft Authorized Technical Education Center, providing training for
Microsoft Windows 95, Windows NT, and BackOffice. In each of the three fiscal
years ended April 30, 1998, 1997 and 1996, the Company's Education Services were
included in the Other Services for financial reporting purposes. Beginning in
the quarter ending July 31, 1998, Education Services will be included with
Professional Services.
Engineering Services provides implementation and deployment of
solutions created by the Consulting Services, third-party service providers or
customers. Engineering Services also offers short-term supplemental staffing to
customers to assist them in completing their projects. Vanstar's Engineering
Services personnel are certified in the major network operating systems and have
extensive experience with local and wide area networking products and protocols.
Program and Project Management provides nationwide project management
services for all Consulting Services and Engineering Services projects,
specializing in structuring and managing technology projects.
LIFE CYCLE SERVICES
Vanstar offers a variety of network operation and support services
aimed at maintaining the highest levels of network reliability and return on
investment for its customers. Life Cycle Services include repair and
maintenance, help desk and network monitoring and asset management.
The Company installs additional hardware and software to increase the
capacity of, or otherwise upgrade, existing products and systems. Generally,
moves, adds, and changes assist customers in avoiding the costs associated with
acquiring new systems.
The Company offers repair and maintenance services, including extended
warranty service, depot repair, and preventive maintenance. These services are
designed to minimize product failures and to extend the useful life of
equipment. On all products for which the Company is authorized to provide
warranty coverage, including certain products from Compaq, Hewlett-Packard, IBM
and others, the Company offers its customers extended warranty service on
standard manufacturer configurations and optional components, up to 24 hours per
day, 365 days per year, anywhere within 100 miles of any of Vanstar's
approximately 90 service locations in the United States.
The Company offers a single point of contact ("SPOC") service to
provide seamless integration and fulfillment of customer's needs for technology
products, services, training, and support. Customers' end users call one
toll-free number for all of their PC needs, including help desk; installs,
moves, adds, and changes ("IMAC"); system maintenance; procurement management;
asset management; training; and network management. The SPOC coordinates all of
the operations and support services with the goal of reducing the total cost of
PC/LAN/WAN ownership, reducing the risk of deploying new technology, increasing
end-user productivity and increasing end-user satisfaction.
The Company also maintains a network operations center to deliver
remote network and systems management services for its customers. The network
operations center provides remote management to actively monitor customer
networks for optimal performance, manage storage requirements and network
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capacity, manage standard PC configurations across the network, manage
electronic distribution of software, and provide network security monitoring and
administration.
The Company provides asset management services. The Company's asset
management system captures and maintains detailed information about a customer's
installed base of PC hardware and software assets, and about all subsequent
service events related to those assets. It generates reports and schedules
through an end-user interface. The Company can provide a detailed analysis of
the installed base for use in managing asset costs.
ACQUISITION SERVICES
Vanstar's Acquisition Services include product procurement,
configuration, distribution, installation, cabling and connectivity. The Company
sources PCs, servers, network products, computer peripherals, and software from
more than 700 vendors, including Compaq; IBM; Hewlett-Packard; Apple Computer,
Inc.; Sun Microsystems, Inc.; Microsoft; Novell, Inc.; Lotus Development; Cisco
Systems; 3Com Corporation; and Bay Networks, Inc. The Company's customer support
groups in Indianapolis, Indiana and Pleasanton, California provide complete
order management services from quotation to order processing, order tracking,
and fulfillment.
Vanstar maintains centralized configuration and distribution facilities
in two highly automated distribution centers located in Indianapolis, Indiana
and Livermore, California. Those distribution facilities handle product
receiving, warehousing, central configuration, testing, order handling, and
shipping to ensure timely and reliable network equipment deployment, with
services such as set-up, installation, cabling, server connection, and testing.
AUTOMATED SYSTEMS AND DELIVERY
Vanstar is committed to delivering its services in innovative ways in
order to keep pace with customer needs and behaviors. The Company offers
automated systems which utilize open architecture and enable Vanstar's customers
to change the processes they use to manage their PC network support
infrastructures, thereby reducing cost and managing complexity. Vanstar has
invested significant resources automating its internal service delivery systems
and developing electronic links between the Company's systems and its customers'
systems. The Company's automated systems include Vanstar's Aviator, Cockpit,
Distribution Center Management System ("DCMS"), FLEX and Tracker, and NOVA.
- Vanstar Aviator. Vanstar's Aviator is an order management system
designed to give customers access to information about products
available from the Company. Vanstar's Aviator is a web-based
system which provides customers with detailed information on
product pricing and availability, and can generate quotes,
purchase orders, order status, invoice history, on-line help, and
toll-free telephone support. With Aviator, customers can place and
track orders themselves.
- Cockpit. Vanstar's customer service representatives use the
Company's order management system, called "Cockpit," to generate
quotes and to enter and track product orders. Cockpit provides
real-time product availability and pricing information, and
maintains detailed, customer-specific account information,
including account history, standard product configurations,
special pricing, locations, authorized purchasing personnel, and
credit limits.
- DCMS, FLEX and Tracker. DCMS and its FLEX systems operate the
Company's automated distribution and configuration centers located
in Indianapolis, Indiana, and Livermore, California. DCMS and FLEX
manage the flow of orders through the distribution process and
provide the on-line information necessary to configure systems to
customers' standards. Operating on a LAN, DCMS assigns a unique
barcode fingerprint to each SKU as it arrives. Warehouse staff use
radio frequency, hand-held devices to manage and track the
movement of product orders through the centers. Vanstar's Tracker
system tracks each package from the warehouse to the customer
site. Vanstar's distribution centers are co-located with Skyway
depots. The Company's Tracker system is integrated with Skyway's
systems, providing complete point-to-point delivery and tracking.
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- NOVA. NOVA is the service delivery system for the management of
Vanstar's SPOC, dispatch, repair, service reengineering, and asset
management service offerings. NOVA's resource allocation system is
designed to ensure that the appropriate technical personnel are
available to respond to customer service calls. Service calls
placed by customers are received through Vanstar's First Touch
program. NOVA determines which field engineer is available and
sends all relevant customer information to the field engineer
through a field computing device. NOVA is backed by more than 50
strategic parts stocking locations in the United States; spare
parts can be delivered the same day or shipped overnight to either
the customer location or the field service engineer.
- Electronic Links. To create a cooperative service environment,
Vanstar uses electronic links to connect its systems to its
customers' systems through Electronic Data Interchange, the
Internet, or private WANs.
CUSTOMERS
The Company's broad customer base of primarily Fortune 1000 companies
and other large enterprises includes the following, all of which purchased
products and services in excess of $10 million during the 12 months ended April
30, 1998 from the Company:
CUSTOMER NAME INDUSTRY
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Bechtel Corporation Engineering/Construction
BellSouth Corporation Telecommunications
Charles Schwab and Company Inc. Financial Services
Chevron Oil/Gas
Cigna Corporation Insurance
Coca Cola Enterprises Inc. Liquid Non-Alcoholic Beverages
Duke Power Company Utility
Federal Express Corporation Transportation
The Goodyear Tire and Rubber Company Tires and Rubber Products
Hoechst Celanese Corporation Chemicals
IBM Computers
Manpower Inc. Staffing
Microsoft Software
Motorola Inc. High Technology
Monsanto Company Life Sciences
Sun Microsystems, Inc. Computer Systems
Sybase Inc. Software
UNUM Corporation Insurance
Zurich American Insurance Insurance
No single customer accounted for more than 10% of the Company's revenue
during fiscal year 1998.
Vanstar markets its PC network services by targeting executives of
large enterprises who have IT decision-making authority. As of April 30, 1998,
the Company's domestic sales force consisted of more than 700 field sales and
inside service representatives. Vanstar's direct sales force is comprised of
account managers and technical sales personnel. Vanstar's account management
force is responsible for prospecting new business, maintaining and expanding
relationships with current customers, and ensuring customer satisfaction.
Technical sales personnel provide the technical expertise to support and
supplement the sales effort. To improve sales productivity, Vanstar equips its
sales organization with sales force automation tools that provide them with a
complete suite of marketing and account management tools. These tools reduce the
sales representatives' physical dependence on the branch offices, allowing
Vanstar to operate a "virtual office" environment while sharing information
across multiple departments.
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CERTAIN BUSINESS FACTORS
Significant Fluctuations in Revenues and Operating Results
The Company's quarterly and annual revenues and operating results have
varied significantly in the past and are likely to continue to do so in the
future. Revenues and operating results may fluctuate as a result of the demand
for the Company's products and services, the introduction of new hardware and
software technologies offering improved features, the introduction of new
services by the Company and its competitors, changes in the level of operating
expenses, the amount of vendor incentive funds received by the Company (see
"Dependence on Key Vendors, Vendor Incentives and Product Supply" below), the
timing of major service projects, competitive conditions and economic conditions
generally. In particular, the Company's operating results are highly sensitive
to changes in the mix of the Company's product and service revenues, product
margins, inventory adjustments and interest rates. Although the Company attempts
to control its expense levels, these levels are based, in part, on anticipated
revenue levels. Therefore the Company may not be able to control spending in a
timely manner to compensate for any unexpected decrease in revenue or vendor
incentive funds. Further, the purchase of the Company's products and services
generally involves a significant commitment of capital, with the attendant
delays frequently associated with large capital expenditures and authorization
procedures within an organization. For these and other reasons, the Company's
operating results are subject to a number of significant risks over which the
Company has little or no control, including customers' technology life cycle
needs, budgetary constraints and internal authorization reviews. In addition,
the Company historically has experienced significant revenue fluctuations
because of shortages of supply from certain vendors. Shortages of supplies from
vendors have previously occurred due primarily to credit limitations placed on
the Company and the inability of certain manufacturers to supply product on a
timely basis. Any significant shortages of supplies could have a material
adverse effect on the Company. The Company may also experience fluctuations in
its operating costs in the future as it continues to make acquisitions,
implement new information management systems and adjust its business strategy in
the light of changing technology and market conditions. Accordingly, the Company
believes that quarterly and yearly period-to-period comparisons of its operating
results should not be relied upon as an indication of future performance. In
addition, the results of any quarterly period are not necessarily indicative of
results to be expected for a full fiscal year.
Substantial Indebtedness and Fixed Obligations; Dependence on IBMCC; Interest
Rate Sensitivity
The Company's business requires significant working capital to finance
product inventory and accounts receivable. The Company has funded a significant
portion of its working capital requirements through its financing program
agreement (the "Financing Program Agreement") with IBM Credit Corporation
("IBMCC"). As part of the Company's refinancing plan in the fiscal year ended
April 30, 1997, the Company used an aggregate of $300.7 million from its
offering of Preferred Securities (as defined herein) and the Securitization
Facility (as defined herein) to reduce the Company's outstanding indebtedness
under the Financing Program Agreement. At April 30, 1998, the outstanding
principal balance under the Financing Program Agreement was approximately $465.8
million, out of a total of $550 million in available credit. Borrowings under
the line of credit are secured by certain assets of the Company, including
accounts receivable, inventory and equipment. The line of credit is currently
available through October 31, 1998. In the event of termination of the Financing
Program Agreement, the outstanding borrowings under the Financing Program
Agreement mature at the end of the term of the line of credit. Borrowings under
the Financing Program Agreement bear interest at a rate equal to the London
Interbank Offered Rate ("LIBOR") plus 1.6 percentage points, which equated to a
rate of 7.3% as of April 30, 1998. There can be no assurance that IBMCC will
continue to finance the Company's operations, or if such financing is not
continued, that the Company will be able to secure additional debt financing.
During October 1996, Vanstar Financing Trust, a statutory business
trust formed under the laws of the State of Delaware by the Company as sponsor
(the "Trust"), issued 4,025,000 Trust Convertible Preferred Securities
("Preferred Securities") to certain initial purchasers in connection with a Rule
144A offering of the Preferred Securities. In addition, the Trust issued 124,484
common securities to the Company. The proceeds of those sales were invested by
the Trust in $207,474,200 aggregate principal amount of the Company's 6 3/4%
Convertible Subordinated Debentures due 2016 (the "Debentures"). The Preferred
Securities are mandatorily redeemable upon the maturity of the Debentures on
October 1, 2016 or earlier to the extent of any redemption by the Company of any
Debentures. Subject to the Company's right to defer interest payments
thereunder, the
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Company is obligated to make quarterly interest payments under the Debentures of
approximately $3.5 million.
Effective December 20, 1996, the Company established a revolving
funding trade receivables securitization facility (the "Securitization
Facility"), which currently provides the Company with up to $200 million in
available credit. In connection with the Securitization Facility, the Company
sells, on a revolving basis through a wholly-owned subsidiary, an undivided
interest in certain of its trade receivables ("Pooled Receivables"). As of April
30, 1998, the gross proceeds of those sales totaled $200 million. The majority
of those proceeds were used in fiscal year 1997 to reduce the Company's
outstanding indebtedness under the Financing Program Agreement. The additional
borrowings under the Securitization Facility are used, among other purposes, to
provide working capital.
As of April 30, 1998, the Company's total amount of debt outstanding
(including debt evidenced by the Debentures) was approximately $888 million and
the Company had stockholders' equity of approximately $208 million. In addition
to its substantial indebtedness, the Company has significant commitments and
obligations. There can be no assurance that the Company's operating results will
be sufficient for payment of all of its fixed obligations when due. The degree
to which the Company is leveraged could have important consequences including
the following: (i) the Company's ability to obtain other financing in the future
may be impaired or may be available only on terms dilutive to the Company's
stockholders; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness; and (iii) a high degree of leverage may make the Company more
vulnerable to economic downturns and may limit its ability to withstand
competitive pressures. The Company's ability to make scheduled payments on or,
to the extent not restricted pursuant to the terms thereof, to refinance its
indebtedness depends on its financial and operating performance, which is
subject to prevailing economic conditions and to financial, business and other
factors beyond its control.
Dependence on Key Vendors, Vendor Incentives and Product Supply
A significant portion of the Company's revenue is derived from sales of
PC network hardware, peripherals and software, including products of various
major vendors, particularly IBM, Compaq and Hewlett-Packard. The Company has
negotiated the terms of purchase arrangements, including product cost, price
protection, return policies, product allocations, delivery, training, and
support directly with all major vendors. The Company's agreements with its
vendors are generally on a non-exclusive basis and may be terminated by the
vendors upon notice typically ranging from 30 to 90 days. Those agreements
provide the Company with price protection on eligible products in the Company's
inventory. The loss of a major vendor, the deterioration of the Company's
relationship with a major vendor or the failure of the Company to establish good
relationships with major new vendors as they develop could have a material
adverse effect on the Company's business. The Company is also dependent, in
part, upon vendor financing for working capital requirements. The failure of the
Company to obtain vendor financing on satisfactory terms and conditions could
have a material adverse effect on the Company's business, financial condition
and results of operations.
As is typical in its industry, the Company's primary vendors also
provide various incentives for promoting and marketing their products. The
incentives typically range from 1% to 5% of sales or purchases of the vendor's
products. The three major forms of vendor incentives received by the Company are
co-operative funds, market development funds and vendor rebates. Co-operative
funds are earned based upon the sale of the vendor's products and generally must
be used to offset the costs associated with advertising and promotion pursuant
to programs established by the individual vendor. Market development funds are
earned based upon the Company's purchases or sales of the vendor's products and
generally must be used for market development activities approved by the
respective vendor. Vendor rebates are based upon the Company attaining certain
sales or purchase volume targets. Rebates generally can be used as the Company
deems appropriate. Any change in the provision of these incentives could have a
material adverse effect on the Company's operating results, at least until the
Company is able to adjust its expense levels.
The PC industry experiences significant product supply shortages and
customer order backlogs from time to time due to the inability of certain
manufacturers to supply certain products on a timely basis. In addition, certain
vendors have initiated new channels of distribution that increase competition
for the available product supply. The Company has experienced product supply
shortages in the past and expects to experience such shortages from time to time
in the future. Failure to obtain adequate product supplies to fulfill customer
orders on
10
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a timely basis could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company may from
time to time enter into long-term agreements with vendors and suppliers to
purchase certain amounts of product over an extended period of time. There can
be no assurance that the Company will be able to sell such levels of a product
or that such agreements will be ultimately beneficial to the Company.
Gross Margin Risk
Over the past several years, gross margins on computer product sales
have declined due to computer price reductions and intense competition. This
competition will continue to put pressure on the product sales gross margins.
The growth of Professional Services has been substantial for the Company over
the past two fiscal years. There can be no assurance that Professional Services
revenue will continue to grow at rates similar to the previous two years. In
addition, the gross margins for these Professional Services may also decline as
competition continues to intensify. This continued competition will also put
pressure on Professional Services billing and utilization rates. Any material
decrease in those rates may cause a decrease in both gross margin percentage and
the total gross margin. Any decrease in gross margin could have a material
adverse effect on the Company.
Inventory Management
The PC industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
Although it is industry practice for the Company's suppliers to provide price
protection intended to reduce the risk of inventory devaluation, such policies
are subject to change. The Company also has the option of returning, subject to
certain limitations, a percentage of its current product inventories each
quarter to certain manufacturers as it assesses each product's current and
forecasted demand. The amount of inventory that can be returned to suppliers
varies under the Company's agreements and such return policies may provide only
limited protection against excess inventory. There can be no assurance that
suppliers will continue such policies, that unforeseen new product developments
will not materially adversely affect the Company or that the Company can
successfully manage its existing and future inventories.
In order to adequately service its customers, the Company is required
to maintain significant quantities of consumable and repairable parts ("spare
parts") for extended periods of time. Any decrease in the demand for the
Company's maintenance services could result in a portion of the spare parts
becoming excess or obsolete. In addition, rapid changes in technology could
render portions of the Company's spares obsolete and unusable giving potential
to write-offs and a reduction in profitability. The inability of the Company to
effectively manage its spare parts or the need to write-off significant portions
due to obsolescence could have a material adverse effect on the Company's
operating results.
Build-to-Order Delivery Model and Final Assembly
Vanstar is participating in "Build-to-Order" and "Final Assembly"
programs with Compaq, IBM and Hewlett-Packard. To date, these programs have not
been used significantly, but the Company expects these programs to be used
during fiscal year 1999. The objective of these programs is to lower costs by
reducing finished goods inventory, increasing inventory turn ratios and reducing
inventory carrying costs. The Company believes that being able to effectively
utilize these programs will play an important role in providing a competitive
advantage. The potential disadvantage of the Build-to-Order and Final Assembly
programs is that reduced inventory levels could result in inventory shortages
and thereby negatively impact customer service. Conversely, the terms and
conditions associated with these programs typically provide more limited price
protection than has previously been available to the Company. As a result,
carrying higher inventory levels would expose the Company to risk from price
reductions.
Risks Associated with Rapid Technological Change; Dependence on Information
Systems
The markets for the Company's product and service offerings are
characterized by rapidly changing technology and frequent new product and
service offerings. The introduction of new technologies can render existing
products and services obsolete or unmarketable. The Company's continued success
will depend on its ability to enhance existing products and services and to
develop and introduce, on a timely and cost-effective
11
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basis, new products and services that keep pace with technological developments
and address increasingly sophisticated customer requirements. The Company's
business, financial condition and results of operations could be materially
adversely affected if the Company were to incur delays in sourcing and
developing product and service enhancements or new products and services or if
such product and service enhancements or new products and services did not gain
market acceptance.
In addition, the Company has developed proprietary automated systems to
enhance the delivery of its services and products and provide it with a
competitive advantage. No assurance can be given that the Company's automated
systems will function as anticipated, will result in lower costs to the Company
or its customers or will not be rendered obsolete as a result of technological
change.
Concentration of Revenues
No single customer accounted for more than 10% of the Company's
revenues during fiscal years 1998 or 1997. However, during fiscal 1998, the
Company derived approximately 48% of its revenues from its 50 largest customers.
To the extent that the Company is successful in expanding its relationship with
new and existing customers among large enterprises such as the Fortune 1000, its
revenues may become more concentrated. While the Company seeks to build
long-term customer relationships, revenues from any particular customer can
fluctuate from period to period due to such customer's purchasing patterns. Any
termination or significant disruption of the Company's relationships with any of
its principal customers could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
deterioration in the financial condition of any of its principal customers could
expose the Company to the possibility of large accounts receivable write-offs,
which could materially adversely affect the Company's financial condition and
results of operations.
Intense Competition
The markets in which the Company operates are characterized by intense
competition from several types of technical service providers, including
mainframe and mid-range computer manufacturers and outsourcers entering the PC
services marketplace. These include Digital Equipment Corporation Multi-Vendor
Services, Electronic Data Systems Corporation, Hewlett-Packard Multi-Vendor
Services and IBM Global Services. Other competitors include VARs, systems
integrators and third-party service companies, such as CompuCom Systems, Inc.;
DecisionOne Corporation; Entex Information Services, Inc.; GE Information
Technology Services; InaCom Corp.; MicroAge, Inc.; and Technology Service
Solutions. The Company's markets require it to maintain sales personnel to
compete for commercial customers and to have employees experienced in responding
to the competitive bidding requirements of government-related customers. The
Company expects to face further competition from new market entrants and
possible alliances between competitors in the future. Certain of the Company's
current and potential competitors have greater financial, technical, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements, to devote greater resources to the development, promotion and
sales of their products and services or be more effective in responding in
competitive bidding situations than the Company.
Government Contracts
The Company and its subsidiaries act as prime contractors and
subcontractors to various government entities, including agencies of the United
States government. The Company and its subsidiaries primarily provide computer
equipment and related products to governmental entities pursuant to fixed-priced
contracts. Under the contracts, the Company is obligated to deliver products at
a fixed price when and if ordered. All of the equipment sold by the Company to
government entities under those contracts is acquired from third parties at
then-prevailing market prices. Thus, the Company bears the burden of any
manufactures' price increases. The Company's government contracts are subject to
specific procurement regulations and a variety of socioeconomic and other
requirements. Failure to comply with such regulations and requirements could
lead to suspension or debarment, for cause, from additional government
contracting or subcontracting. Among the causes for debarment are violations of
various statutes, including those related to employment practices, the
protection of the environment and the accuracy of records. In addition,
government contractors are subject to oversight audits by government
representatives and may become subject to profit and cost control limitations.
12
13
Although certain of the Company's government contracts have a term of
several years, appropriations for purchases under such contracts are typically
made on a fiscal-year basis only. In addition, even if appropriations are made
for purchases by a governmental entity, the entity may not use all of its
appropriations authority with respect to acquisitions of equipment from the
Company. Consequently, there can be no assurance regarding the actual volume of
sales that may be made thereunder, if any, during any period of time. Finally,
government contracts are typically subject to termination, in whole or in part,
without notice, at the convenience of the government or agency involved. Any
substantial reduction in purchases by governmental entities could have a
material adverse effect on the Company.
Dependence On and Need to Recruit and Retain Key Management and Technical
Personnel
The Company's success depends to a significant extent on its ability to
attract and retain key personnel. In particular, the Company is dependent on its
senior management team and technical personnel. The Company has significantly
expanded its technical staff, including its systems engineering force, in recent
years. As of May 31, 1998 the Company employed more than 4,600 technical
engineers and consulting professionals. Competition for such technical personnel
is intense and no assurance can be given that the Company will be able to
recruit and retain such personnel. The failure to recruit and retain management
and technical personnel could have a material adverse effect on the Company's
growth, revenues and results of operations.
In addition, the Company's growth resulting from expanding operations
and acquisitions has placed significant demands on the Company's management,
operational and technical resources. Such growth is expected to continue to
challenge the Company's sales, marketing, technical and support personnel and
senior management. The Company's future performance will depend in part on its
ability to manage expanding domestic and international operations and to adapt
its operational systems to respond to changes in its business. In particular,
the Company's success will depend on its ability to attract, retain and train
adequate numbers of technical field personnel and effectively integrate any
acquired business operations.
EMPLOYEES
As of May 1998, the Company had approximately 7,100 full-time
employees. The Company has never experienced a work stoppage and its employees
are not covered by a collective bargaining agreement. The Company believes that
its relations with its employees are good.
Technical Personnel. Vanstar deploys more than 4,600 technical
engineers and consulting professionals in the United States. The Company intends
to continue to expand its staff of technical professionals. The technical
personnel are both client dedicated and centrally dispatched, and provide
service on either a contract basis or a project basis. The Company is also
developing groups of technical professionals who specialize in the areas of
operations, methods and practices, process management, and consulting. PSO
currently has 6 groups of national consulting practices staffed with high-end
consultants focused on emerging technologies. The Company's engineering staff is
certified in the major network operating systems and has experience with LAN and
WAN networking products and protocols. The Company supports major network
operating systems, including Microsoft Windows NT and BackOffice, Novell
NetWare, IBM LAN Server and AppleShare.
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EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided
below.
William Y. Tauscher, age 48, became Chairman of the Board of the
Company in September 1987 and Chief Executive Officer in September 1988. He was
President from September 1988 to July 1995. Prior to September 1988, Mr.
Tauscher was Chairman of the Board, President and Chief Executive Officer of
FoxMeyer Corporation, a wholesale pharmaceutical distributor and franchiser
which he co-founded in 1978 and a subsidiary of National Intergroup, Inc., a
diversified holding corporation.
Jay S. Amato, age 38, became President and Chief Operating Officer in
July 1995 and a director in December 1995. From January 1993 until July 1995, he
was Senior Vice President and President, North America Operations of the
Company. From June 1991 until January 1993, Mr. Amato was Senior Vice President,
Major Market Operations of the Company, and from April 1989 until June 1991, he
was Vice President of Business Development of the Company.
Richard N. Anderson, age 41, became Senior Vice President and General
Manager, Sales and Life Cycle Management in September 1997. He was Senior Vice
President, Sales from December 1993 to September 1997 and Vice President, Field
Sales from October 1992 until December 1993.
Kauko Aronaho, age 59, became Senior Vice President and Chief Financial
Officer in June 1997. He worked as an independent consultant in the technology
industry from June 1996 to June 1997. From August 1995 to June 1996, Mr. Aronaho
was the President of SHL Computer Innovations, Inc., a Canadian provider of
products and services to build and manage computer networks ("SHL Computer"). He
was Senior Vice President and Chief Financial Officer of SHL Computer from 1989
to August 1995.
H. Christopher Covington, age 48, became Senior Vice President, General
Counsel and Secretary in August 1994. From April 1993 until August 1994, he was
Vice President. From November 1990 until April 1993, Mr. Covington was Assistant
General Counsel and Assistant Secretary of the Company.
Wayne M. Keegan, age 43, became Senior Vice President, Human Resources
in October 1997. From September 1996 to October 1997, he was Vice President of
Human Resources for The London International Group, Inc., a medical technologies
company. From February 1991 to September 1996, Mr. Keegan was Vice President of
Human Resources and Administration for The Ertl Company, Inc., a producer of
toys, models and collectibles.
Chris M. Laney, age 41, became Senior Vice President and General
Manager, Professional Services in September 1997. He was Senior Vice President,
Networking Services from July 1995 to September 1997. From July 1993 until July
1995, Mr. Laney was Vice President, Networking Services. From April 1992 until
July 1993, he was Western Regional Director of Networking Services.
Ahmad Manshouri, age 57, became Senior Vice President and General
Manager Product Operations in July 1995. He was Senior Vice President,
Purchasing and Vendor Management from January 1993 until July 1995. From July
1992 until January 1993, Mr. Manshouri was a Vice President of the Company.
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ITEM 2. PROPERTIES
The Company leases 29,277 square feet of office space for its corporate
headquarters in Atlanta, Georgia under a lease expiring in August 1999. The
Company leases 92,335 square feet of office space in Alpharetta, Georgia under
two separate leases expiring in November of 1999 and December 2001. The Company
also leases three buildings in Roswell, Georgia totaling 86,880 square feet for
one of its corporate divisions, under a lease expiring in May of 2001. The
Company leases 89,086 square feet of office space in Pleasanton, California
under a lease expiring in May of 2006. The Company's main distribution center is
located in Indianapolis, Indiana, consisting of 415,680 square feet under a
lease expiring in April of 2007. Another distribution center is located in
Livermore, California and equates to 192,000 square feet along with a return
center nearby in Livermore, which consists of 29,000 square feet. The leases for
both facilities in Livermore expire in September of 1999. The Company also
leases a 51,520 square feet repair facility in Wharton, New Jersey. The lease
expires in September of 2004. The Company's new Solution Center, consisting of
85,852 square feet, is located in Tempe Arizona and has a lease term extending
until December of 2007. The Company leases a number of other smaller branch
facilities across the country which contribute to the day-to-day operations of
the Company. The Company believes that its facilities are suitable and adequate
for its present operations.
ITEM 3. LEGAL PROCEEDINGS
On July 3, 1997, a trust claiming to have purchased shares of the
Common Stock filed suit in Superior Court of the State of California. The suit
is entitled David T. O'Neal Trust, Dated 4/1/77, v. Vanstar Corporation, et al.,
Consolidated Case No. CV767266. On January 21, 1998, the same plaintiff, along
with another plaintiff claiming to have purchased shares of Common Stock, filed
suit in the United States District Court for the Northern District of
California, making allegations virtually identical to those in the earlier suit.
The recent suit is captioned David T. O'Neal Trust, Dated 4/1/77, et al. v.
Vanstar Corporation, et al., Case No. C-98-0216 MJJ. Both suits 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 plaintiffs, as holders of the
Common Stock, suffered damage as a result.
The plaintiffs in both suits seek class action status, purporting to
represent a class of purchasers of Common Stock between March 11, 1996 and March
14, 1997, and seek damages in an unspecified amount, together with other relief.
The complaint in the first suit purports to state a cause of action under
California law; the complaint in the recent suit purports to state two causes of
action under the Securities Exchange Act of 1934. On 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 plaintiffs have amended the complaint, but the court has not yet
ruled on the sufficiency of that amended complaint. The Company believes that
the plaintiffs' 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 these actions will not have
a material adverse effect on the Company's financial position or results of
operations, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended April 30, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "VST." The following table sets forth, for the periods
indicated, the range of high and low sales prices for the Common Stock on the
NYSE.
High Low
------- ------
Fiscal Year Ended April 30, 1998:
Fourth Quarter $ 16 1/4 $ 11 1/4
Third Quarter 16 11
Second Quarter 17 1/4 11 9/16
First Quarter 15 1/2 7 1/4
Fiscal Year Ended April 30, 1997:
Fourth Quarter $ 16 1/2 $ 6 1/2
Third Quarter 28 1/4 13 3/4
Second Quarter 29 3/4 15 3/4
First Quarter 17 3/8 12 1/4
As of May 15, 1998, there were 350 holders of record of the Common
Stock.
The Company has never declared or paid any cash dividends on the Common
Stock and does not presently intend to pay cash dividends on the Common Stock in
the foreseeable future. The Company intends to retain future earnings for
reinvestment in its business. The Company's Financing Program Agreement with
IBMCC limits the Company's ability to declare or pay cash dividends on the
Common Stock. In addition, the Indenture relating to the Debentures gives the
Company the right to defer interest payments on the Debentures. If the Company
exercises that interest payment deferral option, then during any deferral
period, the Company may not declare or pay dividends on, or make distributions
with respect to, the Common Stock, except dividends or distributions in shares
of the Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated annual financial data presented below was
derived from the Company's audited consolidated financial statements. This
selected consolidated annual financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto included
elsewhere in this report.
(Dollars in thousands, except per share data)
Seven
Months
Year Ended April 30, Ended Year Ended
------------------------------------------------------ April 30, September 30,
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ -------------
INCOME STATEMENT DATA:
Revenue $ 2,838,802 $ 2,178,566 $ 1,804,813 $ 1,385,392 $ 586,514 $ 1,099,813
Gross margin 414,684 313,964 244,927 210,538 97,002 178,024
Operating income (loss) 101,382 68,279 43,047 28,127 (434) (3,296)
Income (loss) from
continuing operations(1) 44,859 35,138 8,053 1,268 (6,969) (18,751)
Net income (loss) 35,947 29,994 17,247 1,268 44,505 (4,246)
Income (loss) from continuing
operations per share (2)(4)
Basic 0.83 0.72 0.25 0.04 (0.62) (2.02)
Diluted 0.81 0.69 0.23 0.04 (0.24) (1.57)
Income (loss) per share (2)(4)
Basic 0.83 0.72 0.53 0.04 3.78 (0.88)
Diluted 0.81 0.69 0.50 0.04 1.44 (0.68)
April 30,
-------------------------------------------------------------------- September 30,
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ -------------
BALANCE SHEET DATA:
Total assets $ 1,095,764 $ 761,423 $ 803,365 $ 705,295 $ 610,458 $ 576,279
Short-term borrowings 308,351 74,402 - - 262,783 194,660
Current maturities of
long-term debt 5,800 4,785 1,759 7,685 12,788 23,190
Long-term debt, less
current maturities 2,337 5,946 293,007 337,750 6,732 13,017
Company-obligated
mandatorily redeemable
convertible preferred
securities of subsidiary
trust holding solely
convertible subordinated
debt securities of
the company (3) 194,739 194,518 - - - -
Redeemable preferred stock
and accrued dividends - - - - 4,777 4,464
Total stockholders' equity 207,948 166,971 127,053 22,589 24,797 13,584
(1) Represents income from continuing operations before distributions on
preferred securities of Trust of $8.9 million and $5.1 million (net of
applicable taxes) for the years ended April 30, 1998 and 1997,
respectively.
(2) Earnings per share for the fiscal years ended April 30, 1996 and 1995 are
presented giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exchange of all outstanding
warrants for shares of Common Stock in connection with the Company's
initial public offering on March 11, 1996, as if the conversion had
occurred at the later of the beginning of fiscal year 1995 or the issuance
date of the respective security.
(3) The sole asset of the Trust is $207.5 million aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due year 2016.
(4) Effective during the year ended April 30, 1998, the Company adopted FASB
Statement No. 128, Earnings per Share ("Statement 128"). The Company has
restated all prior periods to reflect the change in method required by
Statement 128.
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QUARTERLY OPERATING RESULTS
The following tables set forth the unaudited operating results for each
of the four quarters in fiscal year 1998 and 1997. These numbers have been
derived from the Company's unaudited quarterly financial statements and in the
opinion of management, reflect all adjustments (of a normal and recurring
nature) which are necessary for a fair representation of the results of
operations for the interim periods.
(Dollars in thousands, except per share data)
YEAR ENDED APRIL 30, 1998
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ------------ ------------
REVENUE:
Acquisition services $585,250 $575,606 $624,899 $581,249
Life cycle services 80,898 72,889 65,711 56,194
Professional services 43,095 43,195 42,470 35,053
Other 3,812 11,674 8,669 8,138
-------- -------- -------- --------
Total revenue 713,055 703,364 741,749 680,634
======== ======== ======== ========
GROSS MARGIN:
Acquisition services 59,012 56,161 58,831 56,604
Life cycle services 30,096 24,882 20,023 15,867
Professional services 18,975 18,353 20,791 14,692
Other 1,863 7,110 6,009 5,415
-------- -------- -------- --------
Total gross margin 109,946 106,506 105,654 92,578
======== ======== ======== ========
GROSS MARGIN PERCENTAGE:
Acquisition services 10.1% 9.8% 9.4% 9.7%
Life cycle services 37.2% 34.1% 30.5% 28.2%
Professional services 44.0% 42.5% 49.0% 41.9%
Other 48.9% 60.9% 69.3% 66.5%
-------- -------- -------- --------
Total gross margin percentage 15.4% 15.1% 14.2% 13.6%
======== ======== ======== ========
Selling, general and administrative expenses 82,281 77,862 79,701 73,458
% of total revenue 11.5% 11.1% 10.7% 10.8%
Operating income 27,665 28,644 25,953 19,120
% of total revenue 3.9% 4.1% 3.5% 2.8%
-------- -------- -------- --------
NET INCOME $ 9,630 $ 10,457 $ 9,300 $ 6,560
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.22 $ 0.24 $ 0.22 $ 0.15
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.24 $ 0.21 $ 0.15
======== ======== ======== ========
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YEAR ENDED APRIL 30, 1997
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
REVENUE:
Acquisition services $457,656 $438,587 $463,057 $490,065
Life cycle services 50,697 47,944 42,532 38,939
Professional services 31,208 30,555 27,600 21,698
Other 8,640 10,456 10,544 8,388
-------- -------- -------- --------
Total revenue 548,201 527,542 543,733 559,090
======== ======== ======== ========
GROSS MARGIN:
Acquisition services 45,746 43,494 46,441 48,472
Life cycle services 17,444 16,762 14,548 14,485
Professional services 9,126 9,995 12,273 8,417
Other 5,577 6,417 8,019 6,748
-------- -------- -------- --------
Total gross margin 77,893 76,668 81,281 78,122
======== ======== ======== ========
GROSS MARGIN PERCENTAGE:
Acquisition services 10.0% 9.9% 10.0% 9.9%
Life cycle services 34.4% 35.0% 34.2% 37.2%
Professional services 29.2% 32.7% 44.5% 38.8%
Other 64.5% 61.4% 76.1% 80.4%
-------- -------- -------- --------
Total gross margin percentage 14.2% 14.5% 14.9% 14.0%
======== ======== ======== ========
Selling, general and administrative expenses 68,960 60,489 59,340 56,896
% of total revenue 12.6% 11.5% 10.9% 10.2%
Operating income 8,933 16,179 21,941 21,266
% of total revenue 1.6% 3.1% 4.0% 3.8%
-------- -------- -------- --------
NET INCOME $ 1,632 $ 7,521 $ 11,078 $ 9,763
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ .04 $ .18 $ .27 $ .24
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ .04 $ .17 $ .26 $ .23
======== ======== ======== ========
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company's results of operations for the three fiscal years ended
April 30, 1998 were impacted by the following transactions. On May 24, 1996, the
Company acquired certain of the assets and business operations of the western
and southwestern regions of Dataflex Corporation (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 with
combined revenues of $145 million reported for the fiscal year ended March 31,
1996. On September 4, 1996, the Company acquired Mentor Technologies, Ltd., an
Ohio limited partnership providing training and educational services in Ohio and
throughout the upper mid-western United States ("Mentor Technologies"). Mentor
Technologies reported revenues of $5.5 million for the calendar year ended
December 31, 1995. During October 1996, the Company, through the Vanstar
Financing Trust, issued 4,025,000 Preferred Securities. The Preferred Securities
are convertible into 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. ("CDS"), a
North Carolina corporation with reported revenues of $74.3 million for the
fiscal year ended March 31, 1996. CDS provided outsourcing of integrated
information technology services, related technical support services and
procurement of computer hardware and software. Effective December 20, 1996, the
Company established the Securitization Facility, which currently provides the
Company with up to $200 million in available credit. On July 7, 1997, the
Company acquired certain assets and assumed certain liabilities of Sysorex
Information Systems, Inc. ("Sysorex"), a government technology provider which
reported revenues of approximately $150 million for its fiscal year ended
September 30, 1996.
Vanstar's four primary sources of revenue are: Acquisition Services
(formerly referred to as "Product"), Life Cycle Services, Professional Services,
and Other. 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, Vanstar can manage
every phase of the life cycle of its customers' PC networks. Acquisition
Services revenue is primarily derived from the sale of computer hardware,
software, peripherals and communications devices manufactured by third parties
and sold by the Company, principally to implement integration projects. Life
Cycle Services revenue is primarily derived 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 primarily derived 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 revenue has been derived primarily from training
and education services and from fees earned on the distribution services
agreement with ComputerLand Corporation (formerly with Merisel FAB). Pursuant to
the distribution services agreement, the Company provided product distribution
to franchises and affiliates of ComputerLand Corporation ("Computerland"), a
subsidiary of Synnex Technologies, Inc. ("Synnex"), through January 1998.
20
21
The following table sets forth, for the periods indicated, the
Company's (i) total revenue, gross margin and gross margin percentage by revenue
source, (ii) selling, general and administrative expenses in total and as a
percentage of total revenue and (iii) operating income in total and as a
percentage of total revenue:
(Dollars in thousands)
YEAR ENDED APRIL 30,
-------------------------------------------------
1998 1997 1996
--------------- --------------- ------------
REVENUE:
Acquisition services $2,367,004 $1,849,365 $1,578,298
Life cycle services 275,692 180,112 138,418
Professional services 163,813 111,061 58,127
Other 32,293 38,028 29,970
---------- ---------- ----------
Total revenue $2,838,802 $2,178,566 $1,804,813
========== ========== ==========
GROSS MARGIN:
Acquisition services $ 230,608 $ 184,153 $ 147,894
Life cycle services 90,868 63,239 49,131
Professional services 72,811 39,811 23,013
Other 20,397 26,761 24,889
---------- ---------- ----------
Total gross margin $ 414,684 $ 313,964 $ 244,927
========== ========== ==========
GROSS MARGIN PERCENTAGE
Acquisition services 9.7% 10.0% 9.4%
Life cycle services 33.0% 35.1% 35.5%
Professional services 44.4% 35.8% 39.6%
Other 63.2% 70.4% 83.0%
---------- ---------- ----------
Total gross margin percentage 14.6% 14.4% 13.6%
========== ========== ==========
Selling, general and administrative expenses $ 313,302 $ 245,685 $ 201,880
% of total revenue 11.0% 11.3% 11.2%
Operating income $ 101,382 $ 68,279 $ 43,047
% of total revenue 3.6% 3.1% 2.4%
Year Ended April 30, 1998 as Compared to the Year Ended April 30, 1997
Acquisition services. Revenue increased 28.0% to $2.4 billion for the
year ended April 30, 1998 from $1.8 billion for the year ended April 30, 1997 as
a result of the Company's successful sales and marketing efforts, strengthened
market position and increased sales resulting from the acquisitions of CDS, the
Dataflex Regions and Sysorex. Gross margin increased 25.2% to $230.6 million for
the year ended April 30, 1998 from $184.2 million for the year ended April 30,
1997. Gross margin percentage decreased to 9.7% for the year ended April 30,
1998 from 10.0% for the year ended April 30, 1997. The decrease in gross margin
percentage was due to lower margins on sales to the federal government and the
intense competition that exists in the product sales business. This was
partially offset by an increase in vendor incentive funds. Vanstar operates in a
very aggressive business environment that will continue to put pressure on unit
pricing and gross margin received from product sales.
Life cycle services. Revenue increased 53.1% to $275.7 million for the
year ended April 30, 1998 from $180.1 million for the year ended April 30, 1997.
This increase was the result of increased demand for the Company's overall life
cycle service offerings plus increased sales as the result of the acquisition of
CDS in December 1996. Gross margin increased 43.7% to $90.9 million for the year
ended April 30, 1998 from $63.2 million for the year ended April 30, 1997. Gross
margin percentage decreased to 33.0% for the year ended April 30, 1998 from
35.1% for the year ended April 30, 1997 primarily due to one-time implementation
costs associated with the Life Cycle Services support system.
21
22
Professional services. Revenue increased 47.5% to $163.8 million for
the year ended April 30, 1998 from $111.1 million for the year ended April 30,
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 continued transition by the Company's customers to new
higher-performance technologies and increased utilization of client/server
networks. Gross margin increased 82.9% to $72.8 million for the year ended April
30, 1998 from $39.8 million for the year ended April 30, 1997. Gross margin
percentage increased to 44.4% for the year ended April 30, 1998 from 35.8% for
the year ended April 30, 1997 primarily due to higher utilization rates, as well
as higher rates charged for professional services, which were partially offset
by higher labor costs.
Other. Revenue decreased 15.1% to $32.3 million for the year ended
April 30, 1998 from $38.0 million for the year ended April 30, 1997 primarily
due to a decrease in the fees earned on the distribution agreement with Synnex's
subsidiary, Computerland, partially offset by proceeds from the sale of the
classroom instruction portion of the Education Services business in January
1998. The Company completed its obligation under the Synnex agreement in January
1998. Gross margin decreased 23.8% to $20.4 million for the year ended April 30,
1998 from $26.8 million for the year ended April 30, 1997. Gross margin
percentage decreased to 63.2% for the year ended April 30, 1998 from 70.4% for
the year ended April 30, 1997 primarily as a result of a change in revenue mix.
In fiscal year 1998 training-related revenue accounted for 68.7% of the total
other services revenue compared to only 46.1% of the total other services
revenue in fiscal year 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 27.5% to $313.3 million for the year ended
April 30, 1998 from $245.7 million for the year ended April 30, 1997. Selling,
general and administrative expenses as a percentage of total revenue decreased
to 11.0% for the year ended April 30, 1998 from 11.3% for the year ended April
30, 1997. The increase in selling, general and administrative expenses was
primarily due to the continued increase in services revenue as a percentage of
total revenue (which carries higher selling, general and administrative expenses
than product) and increases in the corporate infrastructure. This was partially
offset by an increase in vendor incentive funds received. These vendor incentive
funds are based principally on the attainment of certain sales activities or
sales volumes of vendor's products. There can be no assurance that vendor
incentive funds will continue at the levels experienced during the year ended
April 30, 1998. A substantial reduction in these vendor funds available to the
Company could have a material adverse effect on selling, general and
administrative expenses as a percentage of revenue and future results of
operations.
Operating income. Operating income increased 48.5% to $101.4 million
for the year ended April 30, 1998 from $68.3 million for the year ended April
30, 1997. Operating income as a percentage of total revenue increased to 3.6%
for the year ended April 30, 1998 from 3.1% for the year ended April 30, 1997 as
a result of the increase in total gross margin percentage and a reduction in
selling, general and administrative expenses as a percentage of revenue.
Interest income. Interest income decreased 67.5% to $1.2 million for
the year ended April 30, 1998 from $3.7 million for the year ended April 30,
1997 primarily due to lower discounts taken.
Financing expenses, net. Financing expenses, net for the year ended
April 30, 1998 represents primarily interest incurred on borrowings under the
Company's Financing Program Agreement with IBMCC and discounts and net expenses
associated with the Securitization Facility. Financing expenses, net for the
year ended April 30, 1997 represents primarily interest incurred on borrowings
under the Financing Program Agreement and discounts and net expenses associated
with the Securitization Facility beginning in December 1996. Financing expenses,
net increased 90.4% to $32.5 million for the year ended April 30, 1998 from
$17.1 million for the year ended April 30, 1997 due to higher average borrowings
partially offset by lower interest rates. The increase in average borrowings was
due to increases in inventories that were funded with short-term borrowings and
additional funding requirements due to increased revenue.
Taxes. The effective tax rate for the year ended April 30, 1998 and
1997 of 36% was different than the U.S. statutory rate of 35.0% primarily due to
state tax provisions.
22
23
Year Ended April 30, 1997 as Compared to the Year Ended April 30, 1996
Acquisition services. Revenue increased 17.2% to $1.8 billion for the
year ended April 30, 1997 from $1.6 billion for the year ended April 30, 1996 as
a result of the Company's successful sales and marketing efforts, strengthened
market position and increased sales resulting from the acquisitions of CDS and
the Dataflex Regions. Gross margin increased 24.5% to $184.2 million for the
year ended April 30, 1997 from $147.9 million for the year ended April 30, 1996.
Gross margin percentage increased to 10.0% for the year ended April 30, 1997
from 9.4% for the year ended April 30, 1996. The increase in gross margin
percentage reflects the changing nature of the Company's relationships with its
customers in moving toward long-term procurement service relationships as
opposed to periodic commodity buying.
Life cycle services. Revenue increased 30.1% to $180.1 million for the
year ended April 30, 1997 from $138.4 million for the year ended April 30, 1996.
This increase was the result of increased demand for the Company's overall life
cycle service offerings plus increased sales as the result of the acquisition of
CDS in December 1996. Gross margin increased 28.7% to $63.2 million for the year
ended April 30, 1997 from $49.1 million for the year ended April 30, 1996. Gross
margin percentage decreased to 35.1% for the year ended April 30, 1997 from
35.5% for the year ended April 30, 1996.
Professional services. Revenue increased 91.1% to $111.1 million for
the year ended April 30, 1997 from $58.1 million for the year ended April 30,
1996. This increase reflects the increased customer demand for the Company's
extensive consulting and deployment expertise through national practices focused
on emerging technologies. Gross margin increased 73.0% to $39.8 million for the
year ended April 30, 1997 from $23.0 million for the year ended April 30, 1996.
Gross margin percentage decreased to 35.8% for the year ended April 30, 1997
from 39.6% for the year ended April 30, 1996 due to significant investments made
in systems, recruiting, training, and development to enhance the Company's
professional service offerings.
Other. Revenue increased 26.9% to $38.0 million for the year ended
April 30, 1997 from $30.0 million for the year ended April 30, 1996 due to an
increase in training revenues primarily as a result of the acquisition of Mentor
Technologies. Gross margin increased 7.5% to $26.8 million for the year ended
April 30, 1997 from $24.9 million for the year ended April 30, 1996. Gross
margin percentage decreased to 70.4% for the year ended April 30, 1997 from
83.0% for the year ended April 30, 1996 as the contribution of training revenues
to total other services revenue increased. Revenue from training increased
127.0% and other revenue declined 7.8% for the year, resulting in an increase in
the contribution from training from 25.8% to 46.1%.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased 21.7% to $245.7 million for the year ended
April 30, 1997 from $201.9 million for the year ended April 30, 1996. Selling,
general and administrative expenses as a percentage of total revenue remained
relatively constant for the year ended April 30, 1997 as compared to the year
ended April 30, 1996. The increase in selling, general and administrative
expenses was due to an increase in services revenue as a percentage of total
revenue (which carries higher selling, general and administrative expenses than
product), lower than expected product revenues and certain costs associated with
resizing the Company to accommodate a reduction in the growth rate of the
product business. These increases were partially offset by the reversal of
certain amounts provided for in the original reserves established in connection
with the sale of the Company's U.S. franchise business.
Operating income. Operating income increased 58.6% to $68.3 million for
the year ended April 30, 1997 from $43.0 million for the year ended April 30,
1996. Operating income as a percentage of total revenue increased to 3.1% for
the year ended April 30, 1997 from 2.4% for the year ended April 30, 1996 as a
result of the increase in total gross margin percentage.
Interest income. Interest income decreased 33.5% to $3.7 million for
the year ended April 30, 1997 from $5.5 million for the year ended April 30,
1996 due to lower interest earned on the Company's extended credit on certain of
its trade receivables due from Merisel FAB plus lower discounts taken.
Financing expenses, net. Financing expenses, net for the year ended
April 30, 1997 represents primarily interest incurred on borrowings under the
Company's Financing Program Agreement with IBMCC and discounts and net expenses
associated with the Securitization Facility, which was established in December
1996. Financing expenses, net for the year ended April 30, 1996 represents
primarily interest incurred on borrowings under the Financing Program Agreement.
Financing expenses, net decreased 52.3% to $17.1 million for the year ended
23
24
April 30, 1997 from $35.8 million for the year ended April 30, 1996 due to
significantly lower average borrowings and lower interest rates. The reduced
average borrowings that resulted in lower financing expenses were due to the
issuance of the Debentures to the Trust in October 1996, the proceeds of which
were used to repay borrowings under the Financing Program Agreement, combined
with improved cash flow from increased profitability (see note 9 of notes to
consolidated financial statements).
Taxes. The effective tax rate for the year ended April 30, 1997 of 36%
and 1996 of 37%, was different than the U.S. statutory rate of 35.0% primarily
due to state tax provisions.
Deferred Tax Assets
At April 30, 1998 and 1997, the Company has recorded net deferred tax
assets of $20.6 million and $14.9 million, respectively. The full realization of
the deferred tax assets carried at April 30, 1998 is dependent upon the
Company's generating future pretax earnings. Management believes that sufficient
taxable income will be generated from operations to realize the net deferred tax
assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has utilized cash generated from operations, including
sales of certain of its trade receivables, and proceeds from the issuance of
Preferred Securities and Common Stock to fund its significant revenue growth,
working capital requirements, payments on its debt obligations, and purchases of
businesses and capital expenditures.
In October 1996, the Trust issued the Preferred Securities, raising
gross proceeds of $201.3 million. The holders of the Preferred Securities are
entitled to cumulative cash distributions at an annual rate of 6 3/4% of the
liquidation amount of $50 per security. The distributions are payable quarterly
in arrears in the aggregate amount of approximately $3.5 million per quarter.
The aggregate net proceeds to the Company totaled $194.4 million after selling
expenses, discounts and commissions. The Company used the net proceeds of the
offering to reduce its outstanding indebtedness to IBMCC.
Effective December 20, 1996, the Company established the Securitization
Facility, which currently provides the Company with up to $200 million in
available credit. As of April 30, 1998, the Company had $200 million outstanding
under the Securitization Facility.
The Company currently has a $550 million line of credit under its
Financing Program Agreement with IBMCC. On July 1, 1998, the available line of
credit is scheduled to be reduced to $500 million. At April 30, 1998, the
Company had $465.8 million outstanding under this facility, of which $157.4
million is included in accounts payable and $308.4 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. Amounts borrowed under
the line of credit bear interest at a rate equal to the LIBOR plus 1.6%
(representing a rate of 7.3% at April 30, 1998). The line of credit is currently
scheduled to expire October 31, 1998.
During fiscal year 1998, the Company's operating activities used cash
of $151.5 million primarily as a result of increases in accounts receivable and
inventory. The increase in accounts receivable was due to an increase in revenue
and the increase in inventory was the result of the Company utilizing certain
favorable purchasing programs and incentives offered by certain of its vendors.
During fiscal year 1998, the Company used cash of $34.2 million (net of cash
acquired) to purchase various businesses and used cash of $40.4 million for
capital expenditures. The Company also used $10.1 million to make payments on
certain long-term obligations. The Company plans to make additional investments
in its automated systems and its capital equipment during fiscal year 1999.
During fiscal year 1998, the Company acquired Sysorex for $32.5 million
in cash, plus the assumption of certain liabilities, and a contingent payment of
500,000 shares of the Common Stock based on the future performance of the
acquired business. The Company continues to pursue the acquisition of other
companies that sell products and services that either complement or expand its
existing business.
24
25
The Company intends to continue to finance a significant portion of its
working capital needs through credit facilities. The Company believes that cash
generated from operations and credit facilities will be sufficient to meet its
cash requirements and fund its planned growth through at least the end of fiscal
1999.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Non applicable.
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Vanstar Corporation:
We have audited the accompanying consolidated balance sheets of Vanstar
Corporation as of April 30, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended April 30, 1998. Our audits also included the financial
statement schedule listed in Item 14(a) of this Annual Report on Form 10-K.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Vanstar Corporation at April 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended April 30, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
June 3, 1998
26
27
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
APRIL 30,
----------------------------
1998 1997
--------------- ----------
ASSETS
Current assets:
Cash $ 9,476 $ 5,686
Receivables, net of allowance for doubtful accounts of
$8,262 at April 30, 1998 and $8,252 at April 30, 1997 342,752 183,005
Inventories 470,474 389,592
Deferred income taxes 17,387 14,855
Prepaid expenses and other current assets 14,304 8,618
---------- ----------
Total current assets 854,393 601,756
Property and equipment, net 53,303 39,240
Other assets, net 81,272 63,775
Goodwill, net of accumulated amortization of $10,113 at April 30,
1998 and $5,640 at April 30, 1997 106,796 56,652
---------- ----------
$1,095,764 $ 761,423
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 290,187 $ 255,147
Accrued liabilities 63,590 34,392
Deferred revenue 21,869 24,601
Short-term borrowings 308,351 74,402
Current maturities of long-term debt 5,800 4,785
---------- ----------
Total current liabilities 689,797 393,327
Long-term debt, less current maturities 2,337 5,946
Other long-term liabilities 943 661
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,739 194,518
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,489,030 shares issued and outstanding at April 30, 1998,
42,896,779 shares issued and outstanding at April 30, 1997 43 43
Additional paid-in capital 132,703 125,926
Retained earnings (since a deficit elimination of $78,448
at April 30, 1994) 75,202 41,002
---------- ----------
Total stockholders' equity 207,948 166,971
---------- ----------
$1,095,764 $ 761,423
========== ==========
See accompanying notes to consolidated financial statements
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28
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
YEAR ENDED APRIL 30,
---------------------------------------------------
1998 1997 1996
--------- ---------- -----------
Revenue:
Acquisition services $ 2,367,004 $ 1,849,365 $ 1,578,298
Other services 471,798 329,201 226,515
----------- ----------- -----------
Total revenue 2,838,802 2,178,566 1,804,813
----------- ----------- -----------
Cost of revenue:
Acquisition services 2,136,396 1,665,212 1,430,404
Other services 287,722 199,390 129,482
----------- ----------- -----------
Total cost of revenue 2,424,118 1,864,602 1,559,886
----------- ----------- -----------
Gross margin 414,684 313,964 244,927
Selling, general and administrative expenses 313,302 245,685 201,880
----------- ----------- -----------
OPERATING INCOME 101,382 68,279 43,047
Interest income 1,198 3,685 5,539
Financing expense, net (32,485) (17,061) (35,804)
----------- ----------- -----------
Income from continuing operations before income taxes
and distributions on preferred securities of Trust 70,095 54,903 12,782
Income tax provision (25,236) (19,765) (4,729)
----------- ----------- -----------
Income from continuing operations before
distributions on preferred securities of Trust 44,859 35,138 8,053
Gain on disposal of discontinued businesses
(less income taxes of $5,400) -- -- 9,194
Distributions on convertible preferred securities
of Trust (less income taxes of $5,013 in 1998 and
$2,893 in 1997) (8,912) (5,144) --
----------- ----------- -----------
NET INCOME $ 35,947 $ 29,994 $ 17,247
=========== =========== ===========
EARNINGS PER SHARE:
Basic: Continuing operation .83 .72 .25
Discontinued operations -- -- .28
----------- ----------- -----------
$ .83 $ .72 $ .53
=========== =========== ===========
Diluted: Continuing operations .81 .69 .23
Discontinued operations -- -- .27
----------- ----------- -----------
$ .81 $ .69 $ .50
=========== =========== ===========
COMMON SHARE AND EQUIVALENTS OUTSTANDING
Basic 43,180 41,693 32,413
----------- ----------- -----------
Diluted 44,388 43,282 34,251
=========== =========== ===========
See accompanying notes to consolidated financial statements
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29
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK,
FORMERLY RETAINED
PREFERRED STOCK COMMON STOCK A COMMON STOCK B ADDITIONAL EARNINGS
---------------- -------------- -------------- PAID-IN (ACCUM.
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ------ ------- ------ ------ ------ ---------- -------- ---------
BALANCE AT APRIL 30, 1995 15,309 153 7,323 7 3,708 4 24,768 (2,343) 22,589
Redemption of Class A Common Stock -- -- (103) -- -- -- -- -- --
Issuance of warrants -- -- -- -- -- -- 500 -- 500
Conversion of Class F Preferred Stock
and Senior Preferred Stock to
Class A Common Stock (15,309) (153) 15,309 15 -- -- 138 -- --
Conversion of Class B Common Stock
to Class A Common Stock -- -- 3,708 4 (3,708) (4) -- -- --
Conversion of warrants to Class A
Common Stock -- -- 4,996 5 -- -- (5) -- --
Issuance of Class A Common Stock -- -- 9,216 9 -- -- 83,382 -- 83,391
Accrued dividends forgiven -
Senior Preferred Stock -- -- -- -- -- -- 6,162 -- 6,162
Exercise of stock options -- -- 26 -- -- -- 152 -- 152
Net income -- -- -- -- -- -- -- 17,247 17,247
Dividends on preferred stock -- -- -- -- -- -- -- (2,988) (2,988)
------- ----- ------- ------ ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1996 -- -- 40,475 40 -- -- 115,097 11,916 127,053
Issuance of Common Stock:
Employee stock purchase plan -- -- 389 -- -- -- 3,898 -- 3,898
Exercise of stock options, including
income tax benefit -- -- 597 1 -- -- 6,854 -- 6,855
Business acquisitions -- -- 1,252 2 -- -- -- (2,281) (2,279)
Other -- -- 184 -- -- -- 77 -- 77
Unrealized holding gain on
available-for-sale securities -- -- -- -- -- -- -- 1,373 1,373
Net income -- -- -- -- -- -- -- 29,994 29,994
------- ----- ------- ------ ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1997 -- -- 42,897 43 -- -- 125,926 41,002 166,971
Issuance of Common Stock:
Employee stock purchase plan -- -- 407 -- -- -- 4,767 -- 4,767
Exercise of stock options, including
income tax benefit -- -- 236 -- -- -- 2,010 -- 2,010
Business acquisitions and other -- -- (51) -- -- -- -- --
Accumulated translation adjustment -- -- -- -- -- -- -- (167) (167)
Unrealized holding loss on
available-for-sale securities -- -- -- -- -- -- -- (1,580) (1,580)
Net income -- -- -- -- -- -- -- 35,947 35,947
------- ----- ------- ------ ------ ------ --------- -------- ---------
BALANCE AT APRIL 30, 1998 -- $ -- 43,489 $ 43 -- $ -- $ 132,703 $ 75,202 $ 207,948
======= ===== ======= ====== ====== ====== ========= ======== =========
See accompanying notes to consolidated financial statements
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VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED APRIL 30,
---------------------------------------------
1998 1997 1996
-------- -------- ---------
Cash Flows from Operating Activities:
Net income $ 35,947 $ 29,994 $ 17,247
Adjustments:
Depreciation and amortization 27,129 17,068 9,775
Deferred income taxes (4,858) 16,149 10,029
Provision for doubtful accounts 1,300 (2,705) 14,393
Noncash interest expense 244 -- --
Gain on disposal of discontinued businesses -- -- (14,594)
Changes in operating assets and liabilities:
Receivables (144,758) 154,619 (51,193)
Inventories (68,174) (35,472) (51,720)
Prepaid expenses and other current assets (8,812) (6,322) (2,462)
Accounts payable (2,205) (64,066) 42,177
Accrued and other liabilities 12,726 (22,939) 4,865
--------- --------- ---------
Total adjustments (187,408) 56,332 (38,730)
--------- --------- ---------
Net cash (used in) provided by operating activities (151,461) 86,326 (21,483)
Cash Flows from Investing Activities:
Capital expenditures (40,372) (25,224) (15,583)
Proceeds from sale of building -- 3,125 --
Purchase of businesses, net of cash acquired (34,161) (36,011) --
Sales of businesses -- -- 14,594
Investment in available-for-sale securities -- (10,073) --
--------- --------- ---------
Net cash used in investing activities (74,533) (68,183) (989)
Cash Flows from Financing Activities:
Payments on long-term debt (10,121) (13,506) (7,836)
Borrowings (repayments) under line of credit, net 233,949 (214,670) (46,999)
Proceeds from issuance of convertible preferred
securities of Trust, net -- 194,320 --
Issuance of common stock 5,956 6,901 84,044
--------- --------- ---------
Net cash provided by (used in) financing activities 229,784 (26,955) 29,209
--------- --------- ---------
Net increase (decrease) in cash 3,790 (8,812) 6,737
Cash at beginning of the period 5,686 14,498 7,761
--------- --------- ---------
Cash at end of the period $ 9,476 $ 5,686 $ 14,498
========= ========= =========
See accompanying notes to consolidated financial statements
30
31
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
(In thousands)
YEAR ENDED APRIL 30,
----------------------------------------
1998 1997 1996
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 18,636 $ 17,075 $ 38,761
Discounts and net expenses on receivables
securitization 12,086 3,275 --
Distributions on preferred securities of
Trust 13,584 6,943 --
Income taxes, net of refunds 5,144 3,386 625
Supplemental disclosure of noncash investing and
financing activities:
Equipment acquired under capital leases $ 3,040 $ 8,416 $ 4,293
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 and
liabilities assumed $ 3,229
========
CDS pooling:
Fair value of assets acquired and
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
31
32
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Vanstar Corporation (the "Company") is a leading provider of services
and products designed to build, manage and enhance PC network infrastructures
for Fortune 1000 companies and other large enterprises. The Company provides
customized information technology and networking solutions for its customers by
integrating value-added professional services with its expertise in sourcing,
distributing and supporting PC hardware, network products, computer peripherals
and software from many vendors. The consolidated financial statements include
the accounts of Vanstar Corporation and its consolidated subsidiaries. All
significant intercompany balances have been eliminated. Certain prior period
amounts have been reclassified to conform to current period presentation.
Use of 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.
Revenue Recognition
Acquisition services revenue is primarily derived from the sale of
computer hardware, software, peripherals and communications devices manufactured
by third parties and sold by the Company, principally to implement integration
projects. Other services revenue is derived from value-added services, including
services focused on the server and communication segments of the PC network
infrastructure and services performed for the desktop. Product sales are
recognized at the time of shipment. Revenue from services is recognized as
services are performed or ratably if performed over a service contract period.
Deferred revenue primarily represents unrecognized service revenue.
Financial Instruments
The carrying amounts for cash, receivables, and accounts payable
approximate their respective fair values due to the short-term maturity of these
instruments. The carrying value for amounts outstanding under the Company's
Financing Program Agreement with IBM Credit Corporation ("IBMCC") approximates
fair value since those amounts bear interest at current market rates. Long-term
debt consists of variable-rate instruments at terms the Company believes would
be available if similar financing were obtained from another party. As such,
carrying amounts also approximate their fair value. The carrying value of the
Preferred Securities approximates their fair value based upon quoted market
prices.
Inventories
Inventory for resale and spare parts inventory are stated at the lower of
cost (first-in, first-out method) or market. Periodically, the Company assesses
the appropriateness of the inventory valuations giving consideration to
obsolete, slow-moving and nonsalable inventory.
In order to adequately service its customers, the Company is required to
maintain quantities of consumable and repairable parts ("spare parts") for
extended periods of time. Based on historical experience, the Company determines
an allocation of the spare parts to both current inventories and other long-term
assets.
32
33
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Goodwill
Goodwill represents the excess of cost over the net assets of acquired
businesses and is amortized using the straight-line method over twenty to
twenty-five years. Amortization expense on goodwill was $4.5 million, $2.2
million, and $1.7 million for the fiscal years ended April 30, 1998, 1997, and
1996, respectively. The Company periodically assesses the appropriateness of the
carrying amount of goodwill and the amortization periods based on the
undiscounted value of the current and anticipated future cash flows and
projected profitability of the acquired businesses. If there are indicated
impairments, a write down is recorded to the extent the carrying amount exceeds
the fair value in accordance with Accounting Principles Board ("APB") Opinion
No. 17, Intangible Assets.
Marketing Development Funds
Primary vendors of the Company provide various incentives, in the form of
cash or credit against obligations, for certain training and for promoting and
marketing their products. The funds or credits received are based on the
purchases or sales of the vendors' products and are earned through performance
of specific marketing programs or upon the attainment of certain objectives
outlined by the vendors. Funds or credits earned are recorded as a reduction of
either cost of revenue or selling, general and administrative expenses, based on
the objectives of the program established by the vendors. Funds or credits from
the Company's primary vendors typically range from 1% to 5% of sales or
purchases of vendor products.
Earnings Per Share
Effective during the year ended April 30, 1998, the Company adopted
Financial Accounting Standards Board ("FASB") 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 prior periods to reflect the change in method required by Statement
128. Earnings per share for the fiscal year ended April 30, 1996 are presented
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock and the exchange of all outstanding warrants for shares of
Common Stock in connection with the Company's initial public offering on March
11, 1996 as if the conversion had occurred at the later of the beginning of
fiscal year 1996 or the issuance date of the respective security.
Stock-Based Compensation
The Company accounts for its stock option and employee stock purchase
plans in accordance with APB Opinion No. 25, Accounting For Stock Issued to
Employees ("APB 25"); accordingly, no compensation expense has been recognized.
Under APB 25, because the exercise price of the Company's stock options equals
the market value of the underlying stock on the date of the grant, no
compensation expense is recognized. Because the employee stock purchase plan is
considered a noncompensatory plan under APB 25, no compensation expense is
recognized. The Company has adopted the disclosure only provisions of FASB
Statement No. 123, Accounting For Stock-Based Compensation ("Statement 123").
Note 13 to the consolidated financial statements contains a summary of the pro
forma effects to reported net income and net income per share for the years
ended April 30, 1998, 1997 and 1996 as if the Company had elected to recognize
compensation cost based on the fair value of the options granted as prescribed
by Statement 123.
33
34
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
New Accounting Pronouncements
The Financial Accounting Standards Board recently issued two standards
which will be applicable to the Company but which the Company is not yet
required to adopt, FASB Statement No. 130, Reporting Comprehensive Income, and
FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related
Information. The adoption of these statements will not impact the Company's
financial position or results of operations but may change the presentation of
certain items in the Company's financial statements and related disclosures.
2. ACQUISITIONS
On May 24, 1996, the Company, through a wholly-owned subsidiary, acquired
certain of the assets and assumed certain of the liabilities of Dataflex
Corporation and of Dataflex's wholly-owned subsidiary, Dataflex Southwest
Corporation. The assets acquired and liabilities assumed comprise substantially
all of the assets and 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 and reported revenues of
approximately $145 million for the fiscal year ended March 31, 1996. The
purchase price of the Dataflex Regions, 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 throughout the upper mid-western United States. A total of
300,000 shares of Common Stock (having an aggregate value on the closing date of
approximately $6.0 million) were issued in connection with the acquisition. For
the calendar year ended December 31, 1995, Mentor Technologies reported revenues
of approximately $5.5 million.
On December 16, 1996, the Company acquired Contract Data Services, Inc., a
North Carolina corporation ("CDS"), in exchange for 904,866 shares of the 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. For the fiscal year ended March 31, 1996, CDS reported
total revenues of approximately $74.3 million.
On January 9, 1997, the Company acquired inventory and equipment from DCT
Systems, Inc., a Minnesota corporation, Niloy, Inc., a Georgia corporation, and
NCT Systems, Inc., an Illinois corporation (collectively, "DCT"). The Company
purchased 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
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 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 $54.5 million and a
contingent payment of 500,000 shares of 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 of the cost over the fair value of net assets
acquired for each acquisition is being amortized on a straight line basis
ranging from 20 to 25 years. The operations of these acquisitions are included
in the consolidated statements of income from the respective dates of
acquisition.
34
35
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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, and the proforma amounts are
not disclosed due to the insignificance of the transactions.
3. DISCONTINUED OPERATIONS
On January 31, 1994, the Company sold certain assets and liabilities of
its U.S. franchise business, including all domestic franchise agreements, Datago
distribution agreements and the right to the "ComputerLand" name and trademark
within the United States to Merisel Franchise Aggregation Business ("Merisel
FAB"), a wholly-owned subsidiary of Merisel, Inc. ("Merisel"). Concurrent with
the sale, the Company entered into a distribution services agreement with
Merisel FAB. Pursuant to that agreement, the Company continued to supply product
and provide certain logistics and other support services to Merisel FAB and
received a monthly distribution fee for such services. The Company also granted
Merisel FAB $20.0 million in extended, interest-bearing credit on its product
purchases.
Effective January 31, 1996, the Company and Merisel FAB signed amendments
to the asset purchase agreement and distribution services agreement. The
amendments provided for: the term of the distribution services agreement to be
extended through April 30, 1997; the distribution fee to be reduced retroactive
to April 1, 1995; the additional consideration to be fixed at $14.6 million; the
maximum amount of the extended credit to be increased by $11.1 million, which
would be reduced in monthly installments from February 1996 through July 1997;
and the original amount of interest-bearing credit of $20.0 million to be
extended and reduced in three equal monthly installments from May 15, 1997
through July 15, 1997. The Company recorded a gain of $9.2 million, net of
applicable taxes, for the year ended April 30, 1996 as a result of the
additional consideration. As a result of announcements made by Merisel on
February 20, 1996, the Company decided to record a $31.1 million provision as of
January 31, 1996 against its extended credit due from Merisel FAB. On May 29,
1996, the Company entered into an agreement with a third party under which the
Company received $15.6 million in cash in exchange for providing the third party
the right to receive payments in May, June and July 1997 totaling $20.0 million
out of amounts collected from the extended credit owed to the Company by Merisel
FAB. As a result, the Company adjusted a portion of the reserve on its extended
credit from Merisel FAB resulting in additional pre-tax income of $15.6 million
during the quarter ended April 30, 1996.
On March 28, 1997, the distribution and services agreement was assigned
from Merisel FAB to ComputerLand Corporation, a wholly owned subsidiary of
Synnex Information Technologies, Inc., as a result of the sale by Merisel of
substantially all of the assets of Merisel FAB to ComputerLand Corporation. The
Company completed its obligation under that agreement in January 1998.
4. INVENTORIES
The composition of inventories at April 30, 1998 and 1997 is as follows
(in thousands):
1998 1997
----------- -----------
Inventory for resale $ 462,110 $ 386,664
Less reserve for obsolete inventory 10,135 12,586
----------- -----------
451,975 374,078
Spare parts (current) 18,499 15,514
----------- -----------
$ 470,474 $ 389,592
=========== ===========
35
36
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. PROPERTY AND EQUIPMENT, NET
The composition of property and equipment at April 30, 1998 and 1997
was as follows (in thousands):
1998 1997
-------- --------
Furniture and equipment $ 80,995 $ 84,751
Leasehold improvements 26,235 22,440
-------- --------
107,230 107,191
Less accumulated depreciation and amortization 53,927 67,951
-------- --------
$ 53,303 $ 39,240
======== ========
The carrying value of property and equipment was adjusted to fair value
on April 30, 1994 in connection with the Company's quasi-reorganization.
Additions since April 30, 1994 have been recorded at cost. Property and
equipment is depreciated using the straight-line method over the estimated
useful lives of the related assets--3 to 5 years for furniture and equipment
and the lesser of the lease term or the useful life for leasehold improvements.
Depreciation expense associated with property and equipment was $19.4 million,
$14.4 million and $7.7 million for the fiscal years ended April 30, 1998, 1997
and 1996, respectively. During the year ended April 30, 1998 the Company
wrote-off approximately $32 million of fully depreciated property and equipment.
6. OTHER ASSETS, NET
The composition of other assets at April 30, 1998 and 1997 was as
follows (in thousands):
1998 1997
------- -------
Spare parts (non-current) $40,497 $31,541
Capitalized software, net 24,098 17,551
Available-for-sale security 8,256 10,719
Deferred income taxes (non-current) 3,213 --
Other 5,208 3,964
------- -------
$81,272 $63,775
======= =======
Capitalized software represents the costs associated with development
of software for the Company's internal use. Such costs are capitalized in
accordance with American Institute of Certified Public Accountants Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use, and are amortized over the remaining useful economic
life of the software of up to five years. Accumulated amortization at April 30,
1998 and 1997 was $5.3 million and $2.0 million, respectively. Amortization
expense associated with capitalized software was $2.9 million, $0.5 million and
$0.3 million for the fiscal years ended April 30, 1998, 1997 and 1996,
respectively.
In December 1996, the Company purchased 7.5% of the common stock of
ComputerLand Poland S.A., a publicly traded foreign company, for $8.6 million.
The investment is classified as an "available-for sale" security in accordance
with FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. At April 30, 1998 the fair market value of the investment was
$8.3 million and the gross unrealized holding loss was $.3 million. At April 30,
1998, the net unrealized holding loss of $.2 million (net of taxes of $0.1
million) was included as a reduction to retained earnings. At April 30, 1997,
the net unrealized holding gain of $1.4 million (net of taxes of $.8 million)
was included as an increase to retained earnings. On April 30, 1997, the Company
purchased additional restricted common stock of ComputerLand Poland S.A. for
$1.5 million. At April 30, 1998, the Company owns approximately 8.3% of the
common stock of ComputerLand Poland S.A.
36
37
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. DEBT
Outstanding debt at April 30, 1998 and 1997 was as follows (in
thousands):
1998 1997
-------- --------
Line of credit $308,351 $ 74,402
Obligations under capital leases 7,479 9,838
Other 658 893
-------- --------
Total outstanding debt 316,488 85,133
Less current maturities 314,151 79,187
-------- --------
Long-term debt $ 2,337 $ 5,946
======== ========
The Company's line of credit represents amounts borrowed pursuant to
the Financing Program Agreement with IBMCC, an affiliate of one of the Company's
principal vendors. At April 30, 1998, the line of credit had an aggregate limit
of $550 million. On July 1, 1998, the available line of credit is scheduled to
be reduced to $500 million. The line of credit is secured by portions of the
Company's inventory, accounts receivable and certain other assets. The Financing
Program Agreement is renewable every 12 months, and is terminable by the Company
or IBMCC at any time upon 90 days written notice. In the event of such
termination, the outstanding borrowings are not due and payable to IBMCC until
the end of the term of the Financing Program Agreement, currently October 31,
1998. The terms of the Financing Program Agreement include financial covenants
requiring the Company to maintain compliance with certain financial ratios, and
also limit the Company's ability to pay cash dividends on its Common Stock. As
of April 30, 1998, the Company had complied with or obtained a waiver for any
noncompliance with those financial covenants. At April 30, 1998, amounts
outstanding under the line of credit totaled $465.8 million, of which $157.4
million and $308.4 million were classified as accounts payable and short-term
borrowings, respectively. Amounts outstanding and classified as short-term
borrowings bear interest at LIBOR plus 1.6%, which was 7.3% at April 30, 1998.
Amounts outstanding and classified as short-term borrowings in 1997 bear
interest at the Prime Rate minus .8%, which was 7.7% at April 30, 1997.
Aggregate maturities of long-term debt, excluding the line of credit,
are approximately $5.8 million, $2.0 million, $0.2 million, and $0.1 million,
respectively for each of the succeeding four years.
8. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established the Securitization
Facility, which currently provides the Company with up to $200 million in
available credit. In connection with the Securitization Facility, the Company
sells on a revolving basis, certain 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 $335.2 million at April 30, 1998, is reflected as a reduction of
receivables. The Company retains an interest in certain of the assets sold. At
April 30, 1998, the amount of that retained interest totaled $160.6 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. The gross proceeds resulting from the
sale of the percentage ownership interests in the Pooled Receivables totaled
$200 million as of April 30, 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 $12.1 and
$3.4 million
37
38
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
are included in financing expenses, net on the consolidated statements of income
for the years ended April 30, 1998 and 1997, respectively.
9. CONVERTIBLE PREFERRED SECURITIES OF TRUST
During October 1996, the Trust, of which the Company owns all of the
common trust securities, issued 4,025,000 Preferred Securities. The Preferred
Securities have a liquidation value of $50 per security and are convertible at
any time at the option of the holder into shares of Common Stock at a conversion
rate of 1.739 shares for each Preferred Security, subject to adjustment in
certain circumstances. Distributions on Preferred Securities accrue at an annual
rate of 6 3/4% of the liquidation value of $50 per Preferred Security and are
included in "Distributions on convertible preferred securities of Trust, less
income taxes" in the consolidated statements of income. The proceeds of the
private placement, which totaled $194.4 million (net of initial purchasers'
discounts and estimated offering expenses totaling $6.9 million) are included in
"Company-obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible subordinated debt securities of the
Company" on the consolidated balance sheets. The Company has entered into
several contractual arrangements (the "Back-up Undertakings") for the purpose of
fully and unconditionally supporting the Trust's payment of distributions,
redemption payments and liquidation payments with respect to the Preferred
Securities. Considered together, the Back-up Undertakings constitute a full and
unconditional guarantee by the Company of the Trust's obligations on the
Preferred Securities.
The Trust invested the proceeds of the offering in 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 the Preferred Securities on a pro rata basis
having an aggregate liquidation value equal to the aggregate principal amount of
the Debentures redeemed. The sole assets of the Trust are the Debentures, which
have an aggregate principal amount of $207.5 million. The Debentures and related
income statement effects are eliminated in the Company's consolidated financial
statements.
10. CONCENTRATION OF CREDIT RISK
The Company purchases and sells multi-vendor PC products and provides
various PC-related services to end-users. Although receivables from end-users
are uncollateralized, the credit risk is limited due to the large number and
diversity of customers comprising the Company's customer base. No single
customer accounted for more than 10% of the Company's revenue during fiscal year
1998 and 1997. During fiscal year 1996, no customer other than Microsoft
accounted for more than 10% of the Company's total revenues. Revenues from
Microsoft represented 12.0% of the Company's total revenues for fiscal year
1996.
11. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company has entered into an agreement with one of its vendors that
requires it to purchase a minimum of $55 million of computer software over a
five-year period. At April 30, 1998, the remaining purchase commitment pursuant
to that agreement was $43 million.
Leases
The Company leases certain administrative, warehousing and other
facilities under operating leases, and equipment under a combination of
operating and capital leases. Most of the Company's facility operating leases
are subject to annual escalation clauses ranging from two to five percent.
Several facilities under operating leases have been sublet.
38
39
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The future minimum lease payments on noncancelable operating leases
with an initial term in excess of one year and future sublease income under
noncancelable subleases as of April 30, 1998 are as follows (in thousands):
Minimum Minimum
Lease Sublease
Payments Income
-------- --------
Year Ending April 30,
1999 $16,737 $ 255
2000 12,415 149
2001 9,419 91
2002 7,427 --
2003 6,100 --
Thereafter 18,649 --
------- -------
$70,747 $ 495
======= =======
In connection with leases on facilities associated with acquisitions,
the Company established reserves for future lease payments on certain duplicate
or excess facilities. The balance of these reserves at April 30, 1998 was
approximately $1.7 million, which has not reduced the amounts shown above.
Rental expense, under operating leases, charged to operations was $23.5
million, $19.4 million and $13.8 million during fiscal years ended April 30,
1998, 1997 and 1996, respectively.
The cost of assets recorded under capital leases was $15.0 million and
$12.7 million at April 30, 1998 and 1997, respectively. Accumulated amortization
on such assets was $8.1 million and $3.3 million at April 30, 1998 and 1997,
respectively. The present value of minimum lease payments under capital leases
as of April 30, 1998 was $7.5 million.
Legal Proceedings
On July 3, 1997, a trust claiming to have purchased shares of the
Common Stock filed suit in Superior Court of the State of California. The suit
is entitled David T. O'Neal Trust, Dated 4/1/77, v. Vanstar Corporation, et al.,
Consolidated Case No. CV767266. On January 21, 1998, the same plaintiff, along
with another plaintiff claiming to have purchased shares of Common Stock, filed
suit in the United States District Court for the Northern District of
California, making allegations virtually identical to those in the earlier suit.
The recent suit is captioned David T. O'Neal Trust, Dated 4/1/77, et al. v.
Vanstar Corporation, et al., Case No. C-98-0216 MJJ. Both suits 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 plaintiffs, as holders of the
Common Stock, suffered damage as a result.
The plaintiffs in both suits seek class action status, purporting to
represent a class of purchasers of Common Stock between March 11, 1996 and March
14, 1997, and seek damages in an unspecified amount, together with other relief.
The complaint in the first suit purports to state a cause of action under
California law; the complaint in the recent suit purports to state two causes of
action under the Securities Exchange Act of 1934. On 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 plaintiffs have amended the complaint, but the court has not yet
ruled on the sufficiency of that amended complaint. The Company believes that
the plaintiffs' allegations in both suits are without merit and intends to
defend the suits vigorously.
39
40
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Various legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of these actions will not have a material
adverse effect on the Company's financial position or results of operations,
taken as a whole.
12. STOCKHOLDERS' EQUITY
Initial Public Offering
On March 11, 1996, the Company completed an initial public offering
selling 9,215,770 shares of its Common Stock for approximately $83.4 million,
net of issuance costs.
Preferred Stock, Common Stock and Warrants
Concurrent with the consummation of the initial public offering, all
outstanding shares of Senior Preferred Stock, Class F Preferred Stock and Class
B Common Stock were converted into 19,018,088 shares of Common Stock.
Additionally, all outstanding warrants were exchanged for 4,995,691 shares of
Common Stock, all accrued dividends payable to the holder of the Senior
Preferred Stock totaling $6.2 million were forgiven and all such stock and
warrants converted to Common Stock were canceled.
As of April 30, 1998, the Company had 15,000,000 shares of undesignated
Preferred Stock, $0.01 par value, authorized. No shares have been issued.
At April 30, 1998, the Company had 7,300,640 shares of Common Stock
reserved for future issuance in connection with the Company's stock option and
stock purchase plans.
13. EMPLOYEE BENEFIT PLANS
The Company has elected to follow APB 25 and related interpretations,
in accounting for employee stock options issued to certain of the Company's
employees. Under APB 25, because the exercise price of the Company's stock
options equals the market value of the underlying stock on the date of the
grant, no compensation expense is recognized.
Stock Option Plans
The Company has three stock option plans which provide for the issuance
of incentive stock options ("ISOs"), stock options that are non-qualified for
Federal income tax purposes ("NQSOs") and stock appreciation rights ("SARs").
The 1988 Stock Option Plan was adopted in July 1988 and provides for the
issuance of ISOs, NQSOs and SARs to key employees and directors. The 1993 Stock
Option/Stock Issuance Plan was adopted in April 1993 and provides for the
issuance of shares of Common Stock, ISOs, NQSOs and SARs to highly compensated,
managerial employees, officers and directors. The 1996 Stock Option/Stock
Issuance Plan was adopted in August 1996 and provides for the issuance of shares
of Common Stock, ISOs, NQSOs and SARs to officers, directors and employees of,
and consultants to, the Company. The exercise price of the ISOs under all plans
may not be less than 100% of the fair market value of the Common Stock at the
time of grant. Under the 1993 plan, the exercise price of the NQSOs may not be
less than 85% of the fair market value at the time of grant. At April 30, 1998,
the total number of shares of Common Stock for which options may be granted
pursuant to the 1988, 1993, and 1996 plans were 2.3 million, 2.4 million and 3.3
million, respectively. Under all plans, options generally become exercisable
ratably over a four or five year period and expire in ten years. At April 30,
1998, no SARs had been issued.
40
41
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
A summary of the Company's stock option activity, and related
information for the fiscal years ended April 30, 1998, 1997 and 1996 is as
follows (in thousands, except for weighted-average exercise prices):
Weighted
Average
Number of Exercise
Options Price
--------- --------
Balance at April 30, 1995 2,161 $ 5.71
Granted 2,967 4.35
Exercised (26) 5.83
Canceled (1,285) 5.80
------
Balance at April 30, 1996 3,817 $ 4.62
Granted 1,557 14.22
Exercised (597) 4.87
Canceled (307) 6.07
------
Balance at April 30, 1997 4,470 $ 7.83
Granted 1,763 10.03
Exercised (236) 5.21
Canceled (768) 8.45
------
Balance at April 30, 1998 5,229 $ 8.60
======
Exercisable at April 30, 1998 2,408 $ 7.66
======
Shares Available for Grant at April 30, 1998 1,868
======
The following table summarizes information about the Company's stock
options outstanding and exercisable by price range at April 30, 1998 (options in
thousands):
Exercise Price Ranges Total
------------------------------------------------------ --------------
$0.18 - $5.55 $6.00 - $10.00 $10.13 - $23.87 $0.18 - $23.87
------------- -------------- --------------- --------------
Number outstanding at April 30, 1998 1,906 1,661 1,662 5,229
Weighted-average remaining
contractual life 5.90 years 8.55 years 8.91 years 7.70 years
Weighted-average exercise price for
options outstanding $ 3.58 $9.15 $13.82 $8.60
Number exercisable at April 30, 1998 1,249 590 569 2,408
Weighted-average exercise price for
options exercisable $ 3.88 $9.25 $14.29 $7.66
Stock Purchase Plan
The Company provides an employee stock purchase plan (the "Stock
Purchase Plan") allowing eligible employees to purchase shares of the Common
Stock. The Stock Purchase Plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code"). The total number of shares of Common Stock authorized for issuance
under the plan is 1,000,000. All full-time employees of the Company are eligible
to participate, subject to certain limited exceptions. The Stock Purchase Plan
provides a means for the Company's employees to purchase stock through payroll
deductions of up
41
42
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
to 10% of their gross compensation. The purchase price for shares offered under
the Stock Purchase Plan is equal to 85% of the lower of the closing price of the
Common Stock on the first or last day of the six month offer period. During
fiscal year 1998 and 1997, the Company sold 406,827 and 389,245 shares,
respectively of Common Stock under the Stock Purchase Plan to its employees.
Pro Forma Information
Pro forma disclosure information regarding net income and earnings per
share is required by Statement 123, and has been determined as if the Company
had accounted for its stock options and the Stock Purchase Plan under the fair
value method of that Statement.
For purposes of pro forma disclosures only, the estimated fair value of
the options is amortized to expense over the options' vesting period. The fair
value for all options was estimated at the date of grant using the Black-Scholes
multiple option pricing model with the following assumptions:
1998 1997 1996
--------- --------- ---------
Expected volatility 69% 71% 71%
Risk-free interest rate 5.8% 6.2% 6.0%
Expected life of options 2.0 years 2.0 years 2.0 years
Expected dividend yield 0.0% 0.0% 0.0%
The weighted-average fair value per share of options granted during the
years ended April 30, 1998, 1997 and 1996 was $10.03, $8.09 and $2.55,
respectively. Pro forma net income reflects only options granted in fiscal year
1998, 1997 and 1996. Therefore, the impact of calculating compensation cost for
stock options will not be fully reflected in the pro forma net income and pro
forma earnings per share amounts until fiscal year 2000.
For purposes of pro forma disclosures only, compensation cost
associated with the Stock Purchase Plan is estimated for the fair value of the
employees' purchase rights using the Black-Scholes model with the following
assumptions
1998 1997 1996
-------- -------- --------
Expected volatility 61% 58% 72%
Risk-free interest rate 5.4% 5.3% 5.4%
Expected life of options .5 years .5 years .5 years
Expected dividend yield 0.0% 0.0% 0.0%
The weighted-average fair value per share of those purchase rights
granted in fiscal year 1998, 1997 and 1996 was $2.75, $2.94 and $2.12,
respectively.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
42
43
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Pro forma net income, earnings per share and compensation expense are
as follows (in thousands, except per share data):
YEAR ENDED APRIL 30,
--------------------------------------
1998 1997 1996
------- ------- -------
Net income As reported $35,947 $29,994 $17,247
Pro forma 29,578 23,926 15,119
Basic earnings per share As reported .83 .72 .53
Pro forma .70 .58 .48
Diluted earnings per share As reported .81 .69 .50
Pro forma .68 .56 .45
Compensation expense Pro forma 8,937 8,555 3,221
401(k) Plan
The Company provides a savings plan under section 401(k) of the Code to
substantially all domestic employees who are over the age of 21. Employees can
contribute up to 12% of their annual salary to the plan up to the maximum
allowed by the Code. Prior to August 1, 1996, the Company matched 100% of
certain eligible employee contributions up to $200 not to exceed the maximum of
1% of the employee's eligible compensation. If the employee contributed more
than $200 to the plan, the Company contributed an amount equal to the greater of
$200 or 25% of the employee's contribution up to a maximum of 1% of the
employee's eligible compensation. Effective August 1, 1996, the Company changed
its matching policy to 50% on the first 4% of eligible compensation contributed
by an eligible employee up to a maximum of 2% of the employee's eligible
compensation. The amount charged to expense for the matching contribution was
$2.1 million, $1.3 million and $0.7 million, for the fiscal years ended April
30, 1998, 1997 and 1996, respectively.
14. INCOME TAXES
The income tax provision for the years ended April 30, 1998, 1997 and
1996 computed under FASB Statement No. 109, Accounting for Income Taxes,
consists of the following (in thousands):
1998 1997 1996
-------- -------- --------
Current:
Federal $ 21,371 $ 623 $ --
State 3,710 100 100
-------- -------- --------
25,081 723 100
-------- -------- --------
Deferred
Federal (4,698) 14,319 8,561
State (160) 1,830 1,468
-------- -------- --------
(4,858) 16,149 10,029
-------- -------- --------
Total provision for income taxes $ 20,223 $ 16,872 $ 10,129
======== ======== ========
43
44
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The income tax provision for the years ended April 30, 1998, 1997 and
1996 is allocated between discontinued and continuing operations as follows (in
thousands):
1998 1997 1996
-------- -------- --------
Provision on income before distribution on
preferred securities of Trust $ 25,236 $ 19,765 $ 4,729
Tax benefit allocable to distribution on preferred
securities of Trust (5,013) (2,893) --
-------- -------- --------
Net provision allocated to continuing operations 20,223 16,872 4,729
Provision allocated to operations of discontinued
Businesses and income on disposal of
discontinued businesses -- -- 5,400
-------- -------- --------
Total provision for income taxes $ 20,223 $ 16,872 $ 10,129
======== ======== ========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and income tax purposes. Significant components of deferred
tax assets at April 30, 1998 and 1997 consist of the following (in thousands):
1998 1997
------- -------
Net operating loss carryforwards $ -- $ 1,490
Reserves 11,837 8,237
Inventory 4,554 5,128
State income taxes 1,567 --
Alternative minimum tax credits 2,163 --
Other expenses, not currently deductible 479 --
------- -------
Total net deferred tax assets $20,600 $14,855
======= =======
The full realization of the $20.6 million of deferred tax assets
carried at April 30, 1998 is dependent upon the Company achieving sufficient
future pretax earnings. Although realization is not assured, management believes
that sufficient taxable income will be generated through operations to realize
the net deferred tax assets.
A reconciliation for the years ended April 30, 1998, 1997 and 1996 of
the U.S. statutory income tax rate and the effective rate of the income tax
provision allocated to continuing operations is as follows (in thousands):
1998 1997 1996
-------- -------- --------
Statutory tax rate at 35% $ 19,660 $ 16,403 $ 4,473
State income taxes, net of federal benefit 2,308 1,930 536
Other (1,745) (1,461) (280)
-------- -------- --------
$ 20,223 $ 16,872 $ 4,729
======== ======== ========
44
45
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
15. EARNINGS PER SHARE
Effective during the year ended April 30, 1998, the Company adopted
Statement No. 128. Statement No. 128 supersedes Accounting Principles Board
Opinion No. 15, Earnings Per Share and changes the presentation of earnings per
share. Statement No. 128 replaces the presentation of primary EPS and fully
diluted EPS with basic EPS and diluted EPS. Basic EPS is based on the weighted
average number of common shares outstanding. Diluted EPS is based on the
weighted average number of common shares outstanding and potentially dilutive
common shares, such as stock options. The Company has restated earnings per
share for all prior periods presented. (in thousands, except per share data)
FOR THE YEAR ENDED APRIL 30,
---------------------------------
1998 1997 1996
------- ------- -------
BASIC EARNINGS PER SHARE
Net Income $35,947 $29,994 $17,247
======= ======= =======
Weighted average number of common
shares outstanding 43,180 41,693 32,413
======= ======= =======
Earnings per share $ 0.83 $ 0.72 $ 0.53
======= ======= =======
DILUTED EARNINGS PER SHARE
Net Income $35,947 $29,994 $17,247
======= ======= =======
Weighted average number of common
shares outstanding 43,180 41,693 32,413
Common equivalent shares from stock
options using the treasury stock method 1,208 1,589 1,838
------- ------- -------
Shares used in the per share calculation 44,388 43,282 34,251
======= ======= =======
Earnings per share $ 0.81 $ 0.69 $ 0.50
======= ======= =======
45
46
SCHEDULE II
VANSTAR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
Additions
(Reductions)
Charged
Balance at (Credited) Balance at
Beginning to Costs and Write-offs/ End of
of Period Expenses Other Period
------------ -------------- ------------ ----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended April 30, 1996 $12,326 $14,393 * $11,907** $14,812
Year ended April 30, 1997 14,812 (2,705)*** 3,855 8,252
Year ended April 30, 1998 8,252 1,300 1,290 8,262
INVENTORY RESERVES:
Year ended April 30, 1996 $11,435 $3,854 $2,649 $12,640
Year ended April 30, 1997 12,640 2,300 2,354 12,586
Year ended April 30, 1998 12,586 - 2,451 10,135
* Includes a provision for $4.4 million against the extended interest-bearing
credit and $7.8 million against the extended credit both due from Merisel FAB
(see note 3 of notes to consolidated financial statements).
** Includes the write-off of $4.4 million of the extended interest-bearing
credit due from Merisel FAB.
*** Includes the reversal of $4.2 million of provisions against the extended
interest-bearing credit due from Merisel FAB.
46
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the headings "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the 1998 Proxy Statement is
incorporated herein by reference in response to this item. Certain information
regarding executive officers of the Company is set forth under the heading
"Executive Officers of the Company" in Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The material under the heading "Executive Compensation" in the 1998
Proxy Statement is incorporated herein by reference in response to this item,
except for the material under the subheadings "Compensation Committee Report on
Executive Compensation" and "Comparison of Cumulative Total Returns," which are
not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material under the heading "Security Ownership of Certain
Beneficial Owners, Directors, and Management" in the 1998 Proxy Statement is
incorporated herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material under the heading "Certain Transactions" in the 1998 Proxy
Statement is incorporated herein by reference in response to this item.
47
48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at April 30, 1998 and 1997
Consolidated Statements of Income for the years ended April
30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended April 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
April 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule:
Supplemental Schedule II - Valuation of Qualifying Accounts
and Reserves
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant, as amended
4.1 Certificate of Trust of Vanstar Financing Trust (4)
4.2 Amended and Restated Declaration of Trust of Vanstar Financing
Trust dated as of October 2, 1996, among Jeffrey S. Rubin, Leslie
J. Alvarez, John J. Dunican, Jr. and Wilmington Trust Company as
trustees and Vanstar Corporation as sponsor (4)
4.3 Indenture dated as of October 2, 1996 between Vanstar Corporation
as issuer and Wilmington Trust Company as trustee (4)
4.4 Form of 6 3/4% Preferred Securities (4) (incorporated by reference
to Exhibit A-1 to Exhibit 4.2)
4.5 Form of 6 3/4% Convertible Subordinated Debentures Due 2016 (4)
(incorporated by reference to Exhibit B to Exhibit 4.2)
4.6 Preferred Securities Guarantee Agreement dated October 2, 1996
between Vanstar Corporation as guarantor and Wilmington Trust
Company as preferred guarantee trustee (4)
*10.1 Form of Indemnity Agreement between the Company and each of its
directors and certain officers (1)
10.2 Second Amended and Restated Financing Program Agreement dated
April 30, 1995, between the Registrant and IBM Credit Corporation
("IBMCC"), as amended (1)
*10.3 Form of Executive Involuntary Severance Agreement
10.4 Amended and Restated Registration Rights Agreement dated as of
May 18, 1995, among the Registrant, NYNEX Worldwide Services
Group, Inc., Warburg, Pincus Capital Company, L.P., WP Capco,
Inc., William Y. Tauscher, Richard H. Bard and Microsoft
Corporation (1)
10.5 Lease Agreement dated as of July 14, 1988, entered into between
the Registrant and Rosewood Associates (1)
10.6 Lease Agreement dated as of November 27, 1996 , entered into
between the Registrant and Trans-Fabu, L.P. as amended
10.7 Lease Agreement dated as of December 9, 1993, entered into
between the Registrant and WRC Properties, Inc. (1)
10.8 Lease Agreement dated as of August 21, 1991, entered into among
the Registrant, Lincoln Las Positas and Patrician Associates,
Inc. (1)
48
49
10.9 Standard Industrial/Commercial Single-Tenant Lease-Gross dated as
of March 27, 1995, entered into among the Registrant, Thomas G.
Allan and Annie L. Henry (1)
10.10 Lease Agreement dated as of March 29, 1994, entered into between
the Registrant and TMC Properties, Inc. (1)
10.11 Lease Agreement dated as of November 1, 1991, entered into
between the Registrant and ASC North Fulton Associates Joint
Venture (1)
10.12 Lease Agreement dated as of August 18, 1997 , entered into
between the Registrant and SVA Oxford Limited Partnership
10.13 Lease Agreement dated as of September 3, 1997 , entered into
between the Registrant and Opus Southwest Corporation as amended
10.14 Lease Agreement dated as of June 3, 1996 entered into between the
Registrant and Duke Realty Limited Partnership (5)
10.15 Second Lease Amendment dated as of May 30, 1996 entered into
between the Registrant and Dugan Realty, L.L.C. (5)
10.16 Lease Agreement dated as of June 3, 1996 entered into between the
Registrant and Duke Realty Limited Partnership (5)
10.17 Lease Amendment dated May 15, 1996 entered into between the
Registrant and CM Winprop, Inc. (5)
10.18 Amendment No. 7 to Second Amended and Restated Financing Program
Agreement, dated October 31, 1997, between the Registrant and
IBMCC (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended October 31, 1997)
*10.19 1988 Stock Option Plan (1) (incorporated by reference to Exhibit
4.1)
*10.20 Form of Nontransferable Non-Qualified Stock Option Agreement
under the 1988 Stock Option Plan of the Registrant (1)
(incorporated by reference to Exhibit 4.2)
*10.21 1993 Stock Option/Stock Issuance Plan (1) (incorporated by
reference to Exhibit 4.3)
*10.22 Form of Stock Option Grant and Stock Purchase Agreement under the
1993 Stock Option Plan (1) (incorporated by reference to Exhibit
4.4)
10.23 Employee Stock Purchase Plan (1) (incorporated by reference to
Exhibit 4.5)
*10.24 1996 Stock Option/Stock Issuance Plan, as amended (4)
(incorporated by reference to Exhibit 10.25)
10.25 Amendment No. 5 to Second Amended and Restated Financing Program
Agreement, dated September 25, 1996, between the Registrant and
IBMCC (6)
10.26 Amendment No. 6 to Second Amended and Restated Financing Program
Agreement, dated December 20, 1996, between the Registrant and
IBMCC (7) (incorporated by reference to Exhibit 10.3)
10.27 Receivables Purchase Agreement, dated December 20, 1996, among
Vanstar Finance Co., as seller, the Registrant, as servicer,
Pooled Accounts Receivable Capital Corporation, as purchaser, and
Nesbitt Burns Securities, Inc., as agent (7) (incorporated by
reference to Exhibit 10.1)
10.28 Purchase and Contribution Agreement, dated as of December 20,
1996, between the Registrant and Vanstar Finance Co. (7)
(incorporated by reference to Exhibit 10.2)
10.29 Intercreditor Agreement, dated as of December 20, 1996, among PAR
Accounts Receivable Capital Corporation, the Registrant, Vanstar
Finance Co., and Nesbitt Burns Securities, Inc. (7) (incorporated
by reference to Exhibit 10.4)
10.30 Amendment No. 8 to Second Amended and Restated Financing Program
Agreement, dated December 11, 1997, between the Registrant and
IBMCC (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended January 31, 1998)
10.31 Assignment, Consent to Assignment and Assumption, and Release
Agreement, dated as of March 28, 1997, by and among the
Registrant, Merisel, Inc., Merisel FAB, Inc., and ComputerLand
Corporation (incorporated by reference to Exhibit 10.31 to the
Registrant's Annual Report on From 10-K for the fiscal year ended
April 30, 1997)
10.32 Amendment No. 9 to Second Amended and Restated Financing Program
Agreement, dated March 16, 1998, between the Registrant and IBMCC
49
50
21 List of Subsidiaries
23 Consent of Ernst & Young LLP
27.1 Financial Data Schedule for the year ended April 30, 1998.
27.2 Restated Financial Data Schedule for the periods ended July 31,
1997 and October 31, 1997.
27.3 Restated Financial Data Schedule for the periods ended July 31,
1996, October 31, 1996, and January 31, 1997.
27.4 Restated Financial Data Schedule for the periods ended April 30,
1996 and April 30, 1997.
(1) Incorporated by reference to exhibits with the corresponding numbers
(except as otherwise noted) filed with Registrant's Registration Statement
on Form S-1 (Reg. No. 33-80297) as declared effective by the Commission on
March 8, 1996.
(2) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated May 24, 1996.
(3) Incorporated by reference to Exhibit 10 to the Registrant's Current Report
on Form 8-K dated May 29, 1996.
(4) Incorporated by reference to exhibits with the corresponding numbers
(except as otherwise noted) filed with that Registration Statement on Form
S-1 (Reg. Nos. 333-16307 and 333-16307-01) filed by the Registrant and
Vanstar Financing Trust, as declared effective by the Commission on January
15, 1997.
(5) Incorporated by reference to exhibits with the corresponding numbers filed
with the Registrant's Annual Report on Form 10-K for the fiscal year ended
April 30, 1996.
(6) Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31, 1996.
(7) Incorporated by reference to exhibits with the indicated numbers filed with
the Registrant's Current Report on Form 8-K dated December 26, 1996 and
filed with the Commission on January 10, 1997.
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the quarter
ended April 30, 1998.
50
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
Dated: July 23, 1998 By: /s/ William Y. Tauscher
-----------------------
William Y. Tauscher
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATED
--------- ----- -----
/s/ William Y. Tauscher Chairman of the Board, Chief Executive Officer and July 23, 1998
----------------------- Director (Principal Executive Officer)
William Y. Tauscher
/s/ Kauko O. Aronaho Senior Vice President and Chief Financial Officer July 23, 1998
-------------------- (Principal Financial and Accounting Officer)
Kauko O. Aronaho
/s/ Jay S. Amato President, Chief Operating Officer and Director July 23, 1998
----------------
Jay S. Amato
/s/ John W. Amerman Director July 23, 1998
-------------------
John W. Amerman
/s/ Richard H. Bard Director July 23, 1998
-------------------
Richard H. Bard
/s/ Stephen W. Fillo Director July 23, 1998
--------------------
Stephen W. Fillo
/s/ Stewart K.P. Gross Director July 23, 1998
----------------------
Stewart K.P. Gross
/s/ William H. Janeway Director July 23, 1998
----------------------
William H. Janeway
/s/ John R. Oltman Director July 23, 1998
------------------
John R. Oltman
/s/ John L. Vogelstein Director July 23, 1998
----------------------
John L. Vogelstein
/s/ Josh S. Weston Director July 23, 1998
------------------
Josh S. Weston
51