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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997
REGISTRATION NOS. 333-16307 AND 333-16307-01
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
VANSTAR CORPORATION
VANSTAR FINANCING TRUST
(Exact name of registrant as specified in its charter)
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DELAWARE 7373 94-2376431
DELAWARE 51-6504920
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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COPY TO:
H. CHRISTOPHER COVINGTON, ESQ. STANLEY R. HULLER, ESQ.
SENIOR VICE PRESIDENT, ARTER & HADDEN
GENERAL COUNSEL AND SECRETARY 1717 MAIN STREET
5964 WEST LAS POSITAS BOULEVARD 5964 WEST LAS POSITAS BOULEVARD SUITE 4100
PLEASANTON, CALIFORNIA 94588-9012 PLEASANTON, CALIFORNIA 94588-9012 DALLAS, TEXAS 75201-4605
(510) 734-4000 (510) 734-4000 (214) 761-2100
(Address, including zip code, and
telephone
(Name, address, including zip code, number, including area code, of
and telephone number, including registrant's
area code, of agent for service) principal executive offices)
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--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT
WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 13, 1997
4,025,000 TRUST CONVERTIBLE PREFERRED SECURITIES
VANSTAR FINANCING TRUST
6 3/4% TRUST CONVERTIBLE PREFERRED SECURITIES
(LIQUIDATION AMOUNT $50 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY,
AND CONVERTIBLE INTO COMMON STOCK OF,
VANSTAR CORPORATION
----------------
The 6 3/4% Trust Convertible Preferred Securities (the "Preferred
Securities") offered hereby represent preferred undivided beneficial interests
in the assets of Vanstar Financing Trust, a statutory business trust formed
under the laws of the State of Delaware ("Vanstar Financing Trust" or the
"Trust"). 3,500,000 Preferred Securities were issued and sold (the "Original
Offering") on October 2, 1996 (the "Original Offering Date") and 525,000
Preferred Securities were issued and sold (the "Over-Allotment Offering") on
October 28, 1996 by the Trust to the Initial Purchasers (as defined herein) and
were simultaneously sold by the Initial Purchasers in transactions exempt from
the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), in the United States to persons reasonably believed by the
Initial Purchasers of the Preferred Securities to be "qualified institutional
buyers" (as defined in Rule 144A under the Securities Act), to institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) and outside the United States to non-U.S. persons in offshore
transactions in reliance on Regulation S under the Securities Act. Vanstar
Corporation, a Delaware corporation (the "Company" or "Vanstar"), owns all of
the common securities (the "Common Securities" and, together with the Preferred
Securities, the "Trust Securities") representing undivided beneficial interests
in the assets of the Trust. The Trust exists for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in an equivalent principal
amount of 6 3/4% Convertible Subordinated Debentures due 2016 (the "Convertible
Debentures") issued by the Company. Upon an event of default under the
Declaration (as defined herein), the holders of the Preferred Securities will
have a preference over the holders of the Common Securities with respect to
payments in respect of distributions and payments upon redemption, liquidation
and otherwise.
The Preferred Securities, the Convertible Debentures, the Vanstar common
stock, par value $.001 per share (the "Company Common Stock") issuable upon
conversion thereof and the associated Guarantee (as defined herein)
(collectively, the "Offered Securities") may be offered and sold from time to
time by the holders named in any accompanying supplement to this Prospectus (a
"Prospectus Supplement") or by their transferees, pledgees, donees or successors
pursuant to this Prospectus. The Offered Securities may be sold by the Selling
Holders (as defined herein) from time to time directly to purchasers or through
agents, underwriters or dealers. See "Plan of Distribution" and "Selling
Holders." If required, the names of any such agents or underwriters involved in
the sale of the Offered Securities and the applicable agent's commission,
dealer's purchase price or underwriter's discount, if any, will be set forth in
a Prospectus Supplement. The Selling Holders will receive all of the net
proceeds from the sale of the Offered Securities and, in the event of an
underwritten offering of the Offered Securities, will pay all underwriting
discounts, selling commissions and transfer taxes, if any, applicable to any
such sale. The Company is responsible for payment of all other expenses incident
to the offer and sale of the Offered Securities. The Selling Holders and any
broker/dealers, agents or underwriters which participate in the distribution of
the Offered Securities may be deemed to be underwriters within the meaning of
the Securities Act, and any commission received by them in a profit on the
resale of the Offered Securities purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. See "Plan of
Distribution" for a description of indemnification arrangements.
Each Preferred Security is convertible at the option of the holder thereof
into 1.739 shares of Company Common Stock (equivalent to a conversion price of
$28.75 per share of Company Common Stock), subject to adjustment in certain
circumstances. The Company Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "VST." On January 9, 1997, the closing price of the
Company Common Stock on the NYSE Composite Tape was $21.75 per share. The
Preferred Securities have been designated for trading on the PORTAL Market since
the Original Offering Date. However, Preferred Securities resold pursuant to
this Prospectus will no longer be eligible for trading in such PORTAL Market.
The Company and the Trust do not currently intend to list the Preferred
Securities resold pursuant to this Prospectus on any securities exchange or to
seek approval for quotation through any automated quotation system. Accordingly,
there can be no assurance as to the development or liquidity of any market for
the Preferred Securities resold under this Prospectus.
(CONTINUED ON FOLLOWING PAGE)
--------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
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(CONTINUED FROM FRONT COVER)
Holders of the Preferred Securities are entitled to receive cumulative cash
distributions at an annual rate of 6 3/4% of the liquidation amount of $50 per
Preferred Security, accruing from the Original Offering Date, and payable
quarterly in arrears on each January 1, April 1, July 1 and October 1. The first
distribution on the Preferred Securities was paid January 2, 1997. See
"Description of the Preferred Securities--Distributions." The payment of
distributions out of moneys held by the Trust and payments on liquidation of the
Trust or the redemption of Preferred Securities, as described below, are
guaranteed by the Company (the "Guarantee") to the extent the Trust has funds
available therefor as described under "Description of the Guarantee." The
Guarantee, when taken together with the Company's obligations under the
Indenture (as defined herein) pursuant to which the Convertible Debentures were
issued and its obligations under the Declaration, including its obligations to
pay costs, expenses, debts and liabilities of the Trust (other than with respect
to the Trust Securities), provides a full and unconditional guarantee of amounts
due on the Preferred Securities. The Company's obligations under the Guarantee
rank (i) subordinate and junior to all other liabilities of the Company except
any liabilities that may be PARI PASSU by their terms, (ii) PARI PASSU in right
of payment with the most senior preferred stock issued from time to time by the
Company and with any guarantee now or hereafter entered into by the Company in
respect of any preferred or preference stock or any preferred securities of any
affiliate of the Company and (iii) senior to the Company Common Stock. See
"Description of the Guarantee." The obligations of the Company under the
Convertible Debentures are subordinate and junior in right of payment to Senior
Indebtedness (as defined herein) of the Company, which aggregated approximately
$111.1 million at November 30, 1996. In addition, the Company's obligations
under the Guarantee and the Convertible Debentures are effectively subordinated
to all liabilities of its subsidiaries. See "Description of the Convertible
Debentures--Subordination" and "Capitalization."
The distribution rate and the distribution payment dates and other payment
dates for the Preferred Securities correspond to the interest rate and interest
payment dates and other payment dates, respectively, for the Convertible
Debentures, which are and will continue to be the sole assets of the Trust. If
the Company fails to make principal or interest payments on the Convertible
Debentures, the Trust will not have sufficient funds to make distributions on
the Preferred Securities, in which event the Guarantee will not apply to such
distributions until the Trust has sufficient funds available therefor.
The Company has the right to defer payments of interest on the Convertible
Debentures at any time for up to 20 consecutive quarters (each, an "Extension
Period"), but not beyond the maturity of the Convertible Debentures. If interest
payments are so deferred, distributions on the Preferred Securities also will be
deferred. During any Extension Period, distributions will continue to accrue
with interest thereon (to the extent permitted by applicable law) at a rate of
6 3/4% per annum compounded quarterly. During any Extension Period, holders of
Preferred Securities will be required to include such deferred interest in their
gross income for United States Federal income tax purposes in advance of receipt
of the cash distributions with respect to such deferred interest payments.
Moreover, if a holder of Preferred Securities converts its Preferred Securities
into Company Common Stock during any Extension Period, the holder will not
receive any cash related to the deferred distributions. There could be multiple
Extension Periods of varying lengths throughout the term of the Convertible
Debentures (but distributions would continue to accumulate quarterly and accrue
interest until the end of any such Extension Period). See "Risk Factors-- Option
to Extend Interest Payment Period; Tax Consequences," "Description of the
Preferred Securities-- Distributions" and "Description of the Convertible
Debentures--Option to Extend Interest Payment Period." The Company has not
previously exercised, and does not have any current intention of exercising, its
right to defer payments of interest by extending the interest payment period on
the Convertible Debentures.
The Convertible Debentures are redeemable by the Company, in whole or in
part, from time to time, on or after October 5, 1999 at the redemption prices
set forth herein. The Convertible Debentures may also be redeemed in certain
circumstances upon the occurrence of a Tax Event (as defined herein). If the
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Company redeems the Convertible Debentures, the Trust must redeem on a PRO RATA
basis Trust Securities having an aggregate liquidation amount equal to the
aggregate principal amount of the Convertible Debentures so redeemed at a
redemption price corresponding to the redemption price of the Convertible
Debentures plus accrued and unpaid distributions thereon to the date fixed for
redemption. See "Description of the Preferred Securities--Redemption." The
Preferred Securities will be redeemed upon the maturity of the Convertible
Debentures. In addition, the Trust will be dissolved, except in certain limited
circumstances, upon the occurrence of a Tax Event arising from a change in law
or a change in legal interpretation regarding tax matters. In certain
circumstances involving a Tax Event, the Company will have the right to redeem
the Convertible Debentures. The Trust will also be dissolved upon the occurrence
of an Investment Company Event (as defined herein). Upon dissolution of the
Trust, the Convertible Debentures will be distributed to the holders of the
Trust Securities, on a pro rata basis, in lieu of any cash distribution. If the
Convertible Debentures are distributed to the holders of the Trust Securities,
the Company will use its best efforts to cause the Convertible Debentures to be
listed on the NYSE or such other national securities exchange or similar
organization on which the Preferred Securities are then listed or quoted. See
"Description of the Preferred Securities--Special Event Redemption or
Distribution" and "Description of the Convertible Debentures."
Upon the liquidation, winding up or termination of the Trust, the holders of
the Preferred Securities will be entitled to receive for each Preferred Security
a liquidation amount of $50 plus accrued and unpaid distributions thereon
(including interest thereon) to the date of payment, unless, in connection with
such dissolution, Convertible Debentures are distributed to the holders of the
Preferred Securities. See "Description of the Preferred Securities--Liquidation
Distribution Upon Dissolution."
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements and other information may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Seven World Trade Center, Suite
1300, New York, New York 10048 and at the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Reports, proxy and information
statements and other information filed electronically by the Company with the
Commission are available at the Commission's World Wide Web site at
http://www.sec.gov. In addition, copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports, proxy and information
statements and other information concerning the Company may also be inspected at
the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Offered Securities
offered by this Prospectus. This Prospectus, which constitutes part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, a certain portion of which has been omitted as permitted
by the Rules and Regulations of the Commission. For further information with
respect to the Company and the securities offered by this Prospectus, reference
is made to the Registration Statement, which is on file at the offices of the
Commission and may be obtained upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission
or on the Commission's World Wide Web site. Statements contained in this
Prospectus as to the contents of any documents referred to are not necessarily
complete, and in each such instance, are qualified in all respects by reference
to the applicable documents filed with the Commission.
No separate financial statements of the Trust have been included herein. The
Company does not consider that such financial statements would be material to
holders of Preferred Securities because (i) all of the voting securities of the
Trust are owned, directly or indirectly, by the Company, a reporting company
under the Exchange Act, (ii) the Trust has no independent operations and exists
for the sole purpose of issuing securities representing undivided beneficial
interests in the assets of the Trust and investing the proceeds thereof in the
Convertible Debentures issued by the Company and (iii) the obligations of the
Trust under the Trust Securities are fully and unconditionally guaranteed by the
Company to the extent that the Trust has funds available to meet such
obligations. See "Vanstar Financing Trust," "Description of the Convertible
Debentures" and "Description of the Guarantee."
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain of the matters discussed in this Prospectus include forward-looking
statements that involve risks and uncertainties. Among the risks and
uncertainties to which the Company is subject are the risks inherent in the
Company's substantial indebtedness, the fact that the Company has experienced
significant fluctuations in revenues and operating results, the Company's
relationship to and business dealings with and with regard to Merisel FAB, Inc.,
the risks associated with managing the Company's inventory in light of product
life cycles and technological change, the Company's relationship with its
significant customers, intense price competition in the Company's markets and
the Company's dependence upon its key vendors. As a result, the actual results
realized by the Company could differ materially from the statements made herein.
Potential investors in this offering are cautioned not to place undue reliance
on the forward-looking statements made in this Prospectus, which speak only as
of the date hereof.
------------------------
This Prospectus includes product names, trade names and trademarks of
Vanstar and its subsidiaries and other companies.
4
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." SEE "SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995."
THE COMPANY
The Company is a leading provider of services and products designed to build
and manage personal computer ("PC") network infrastructures, primarily for
Fortune 1000 companies and other large enterprises. The Company provides
customized, integrated solutions for its customers' distributed computing
networks by combining a comprehensive offering of value-added services with its
expertise in sourcing and distributing PCs, network products, computer
peripherals and software from a variety of vendors. These integrated solutions
are designed to support the customer's client/server environments throughout its
life cycle. The Company refers to these solutions as "Life Cycle Management."
Life Cycle Management integrates the offerings of design and consulting,
acquisition and deployment, operation and support, and enhancement and
migration.
Large organizations are becoming increasingly dependent on information
technology to compete effectively in today's global markets. The decision-making
process that organizations face when planning, selecting and implementing
information technology solutions is growing more complex, and, as a result, many
organizations are outsourcing the management and support of their PC network
infrastructure needs. The Company believes that its customers require
increasingly sophisticated PC network systems and support infrastructures. The
Company seeks to satisfy these requirements while seeking to minimize its
customers' internal staff requirements and systems development risk. The Company
enhances the delivery of its services and products with proprietary automated
systems, such as the Vanstar Navigator, and proprietary process methodologies,
such as Horizon, to analyze, design and manage its customers' PC network
infrastructures better. The Company's goal, through the use of these systems and
methodologies, is to reduce the labor component of PC life cycle management and
thereby increase efficiency, reduce costs and make network systems more reliable
and easier to use. The Company's service and product offerings are developed,
delivered and managed by a technical force of over 3,500 employees nationwide,
including a rapidly expanding systems engineering force, which grew from
approximately 200 professionals in March 1994 to approximately 1,200 in November
1996.
The Company believes that certain segments of its industry have begun to
consolidate. In order to maintain its position as a leading provider of PC
network infrastructure solutions to large businesses, the Company believes that
expansion through acquisitions, as well as internal growth, will be necessary.
Effective May 24, 1996, the Company consummated the acquisition of certain of
the assets and business operations of Dataflex Corporation ("Dataflex"),
previously known as the Dataflex Western Region and Dataflex Southwest Region
(the "Dataflex Regions"). These Dataflex Regions offer PC product distribution,
service and support in the states of Arizona, California, Colorado, Nevada, New
Mexico and Utah and reported revenues of approximately $145 million for the
fiscal year ended March 31, 1996. Effective December 16, 1996, the Company
consummated the merger of Contract Data Services, Inc., a North Carolina
corporation ("CDS"), with and into a wholly-owned subsidiary of the Company. CDS
provides outsourcing of integrated information technology services, related
technical support services and procurement of computer hardware and software.
CDS reported total revenues of approximately $74.3 million for its fiscal year
ended March 31, 1996. In addition, the Company has recently consummated certain
other acquisitions in the areas of education services and acquisition and
deployment services. The Company expects, for the foreseeable future, to
continue to evaluate other potential acquisition opportunities, and to
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make additional acquisitions as economic and market conditions, and the
availability of attractive candidates, permit. See "Recent Developments."
In fiscal 1996 and the first six months of fiscal 1997, the Company's
operating performance improved over prior periods due to higher professional
services, and life cycle services and product revenue, higher product gross
margins, decreased fixed costs as a percentage of revenue, as well as cost
reduction efforts and operational improvements. In order to achieve its
objective of continuing to be a leading provider of PC network infrastructure
solutions to large businesses throughout the world, the Company intends to
leverage its broad customer base, to develop and enhance its value-added service
offerings and to expand its worldwide service capabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The principal executive offices of the Company are located at 5964 West Las
Positas Boulevard, Pleasanton, California 94588, and its telephone number is
(510) 734-4000.
THE OFFERING
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The Issuer............................. Vanstar Financing Trust, a Delaware statutory
business trust. The assets of the Trust consist
solely of the Convertible Debentures.
Securities Offered..................... 4,025,000 6 3/4% Trust Convertible Preferred
Securities, 6 3/4% Convertible Subordinated
Debentures, Company Common Stock issuable upon
conversion thereof, and the associated Guarantee.
Selling Holders........................ The Preferred Securities were originally issued by
the Trust and sold by the Initial Purchasers in
transactions exempt from registration under the
Securities Act to (i) "qualified institutional
buyers" pursuant to Rule 144A under the Securities
Act, (ii) institutional "accredited investors"
pursuant to Rule 501(a)(1), (2), (3) or (7) under
the Securities Act and (iii) non-U.S. persons in
offshore transactions under Regulation S
promulgated under the Securities Act. These
purchasers or their transferees, pledgees, donees
or successors may from time to time offer and sell
the Offered Securities pursuant to this Prospectus.
See "Selling Holders." Prior to the resale of
Preferred Securities pursuant to this Prospectus,
each of the Preferred Securities was eligible for
trading in the PORTAL Market. Preferred Securities
resold pursuant to this Prospectus will no longer
be eligible for trading in the PORTAL Market.
Distributions.......................... Distributions on the Preferred Securities have
accrued from the Original Offering Date and are
payable at the annual rate of 6 3/4% of the
liquidation preference of $50 per Preferred
Security. Subject to the distribution deferral
provisions described below, distributions will be
payable quarterly in arrears on each January 1,
April 1, July 1 and October 1. The first
distribution on the Preferred Securities was paid
January 2, 1997. Corporate holders of Preferred
Securities will not be entitled to a dividends-
received deduction.
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Option to Extend Distribution Payment
Period............................... The ability of the Trust to pay distributions on
the Preferred Securities is solely dependent on its
receipt of interest payments on the Convertible
Debentures. The Company has the right at any time,
and from time to time, to defer the interest
payments due on the Convertible Debentures for
successive periods not exceeding 20 consecutive
quarters for each such Extension Period. As a
consequence of such extension, quarterly
distributions on the Preferred Securities would be
deferred by the Trust (but would continue to
accumulate quarterly and would accrue interest)
until the end of any such Extension Period. The
Company will give written notice of deferral of an
interest payment to the Trust, and the Trust shall
give notice thereof to the holders of the Preferred
Securities. See "Risk Factors--Option to Extend
Interest Payment Period; Tax Consequences,"
"Description of the Preferred
Securities--Distributions" and "Description of the
Convertible Debentures--Option to Extend Interest
Payment Period." If an extension of an interest
payment occurs, the holders of the Preferred
Securities will continue to accrue income for
United States Federal income tax purposes in
advance of any corresponding cash distribution.
Moreover, if a holder of Preferred Securities
converts its Preferred Securities into Company
Common Stock during an Extension Period, the holder
will not receive any cash related to the deferred
distributions. See "Risk Factors--Option to Extend
Interest Payment Period; Tax Consequences" and
"Certain United States Federal Income Tax
Considerations--Potential Extension of Interest
Payment Period and Original Issue Discount."
Rights Upon Deferral of
Distributions........................ During any Extension Period, interest on the
Convertible Debentures will compound quarterly and
quarterly distributions (compounded quarterly at
the distribution rate) will accrue on the Preferred
Securities. The Company has agreed, among other
things, not to declare or pay any dividend on any
class of its capital stock during any Extension
Period, subject to the right of the Company to pay
dividends or distributions in shares of Company
Common Stock on Company Common Stock or on the
preferred stock, par value $.01 per share, of the
Company (the "Preferred Stock"), and to certain
other exceptions. See "Description of the
Convertible Debentures--Option to Extend Interest
Payment Period" and "Description of the
Guarantee--Certain Covenants of the Company."
Conversion into Company Common Stock... Each Preferred Security is convertible at the
option of the holder into shares of Company Common
Stock, at the rate of 1.739 shares of Company
Common Stock for each Preferred Security
(equivalent to a conversion price of $28.75 per
share of Company Common Stock), subject to
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adjustment in certain circumstances. The closing
price of Company Common Stock on the NYSE Composite
Tape on January 9, 1997 was $21.75 per share. In
connection with any conversion of a Preferred
Security, the Conversion Agent (as defined herein)
will exchange such Preferred Security for the
appropriate principal amount of Convertible
Debentures and immediately convert such Convertible
Debentures into shares of Company Common Stock. No
fractional shares of Company Common Stock will be
issued as a result of conversion, but in lieu
thereof such fractional interest will be paid by
the Company in cash. See "Description of the
Preferred Securities-- Conversion Rights."
Liquidation Amount..................... Upon any liquidation of the Trust, holders will be
entitled to receive $50 per Preferred Security plus
an amount equal to any accrued and unpaid
distributions thereon to the date of payment,
unless Convertible Debentures are distributed to
such holders. See "Description of the Preferred
Securities--Liquidation Distribution Upon
Dissolution."
Redemption............................. The Convertible Debentures will be redeemable for
cash, at the option of the Company, in whole or in
part, from time to time, on or after October 5,
1999 at the prices specified herein. Upon any
redemption of the Convertible Debentures, the
Preferred Securities will be redeemed at the
applicable redemption price. The Preferred
Securities will not have a stated maturity date,
although they will be subject to mandatory
redemption upon the repayment of the Convertible
Debentures at their stated maturity (October 1,
2016), upon acceleration, earlier redemption or
otherwise. See "Description of the Preferred
Securities--Redemption" and "Description of the
Convertible Debentures--Optional Redemption."
Guarantee.............................. The Company has irrevocably guaranteed, to the
extent set forth herein, the payment in full of (i)
the distributions on the Preferred Securities to
the extent of funds of the Trust available
therefor, (ii) the amount payable upon redemption
of the Preferred Securities to the extent of funds
of the Trust available therefor and (iii)
generally, the liquidation preference of the
Preferred Securities to the extent of the assets of
the Trust available for distribution to holders of
Preferred Securities. The Guarantee is unsecured
and (i) subordinate and junior to all other
liabilities of the Company except any liabilities
that may be PARI PASSU expressly by their terms,
(ii) PARI PASSU in right of payment with the most
senior preferred stock issued from time to time by
the Company and with any guarantee now or hereafter
entered into by the Company in respect of any
preferred or preference stock or preferred
securities of any
</TABLE>
8
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<TABLE>
<S> <C>
affiliate of the Company and (iii) senior to
Company Common Stock. Upon the liquidation,
dissolution or winding up of the Company, its
obligations under the Guarantee will rank junior to
all of its other liabilities, except as aforesaid,
and, as a result, funds may not be available for
payment under the Guarantee. See "Risk
Factors--Ranking of Obligations Under Guarantee and
Convertible Debentures," "Description of the
Guarantee" and "Description of the Convertible
Debentures-- Subordination."
Voting Rights.......................... Generally, holders of the Preferred Securities do
not have any voting rights. See "Description of the
Preferred Securities--Voting Rights."
Tax Event or Investment Company Event
Redemption or Distribution........... Upon the occurrence of a Tax Event or an Investment
Company Event (each as defined herein), except in
certain limited circumstances, the Issuer Trustees
(as defined herein) shall cause the liquidation of
the Trust and cause the Convertible Debentures to
be distributed to the holders of the Preferred
Securities. In certain circumstances involving a
Tax Event, the Company will have the right to
redeem the Convertible Debentures, in whole (but
not in part), at the applicable redemption price
plus accrued and unpaid interest, in lieu of a
distribution of the Convertible Debentures, in
which event the Trust Securities will be redeemed
at the applicable redemption price. See
"Description of the Preferred Securities-- Special
Event Redemption or Distribution."
Convertible Debentures................. The Convertible Debentures are unsecured
obligations of the Company. The Convertible
Debentures mature on October 1, 2016, and bear
interest at the rate of 6 3/4% per annum, payable
quarterly in arrears. Interest payments may be
extended from time to time by the Company for
successive periods not exceeding 20 consecutive
quarters for each such period (during which
interest will continue to accrue and compound
quarterly). Prior to the termination of any
Extension Period, the Company may further extend
the Extension Period provided that such Extension
Period, together with all previous and further
extensions thereof, may not exceed 20 consecutive
quarters and may not extend beyond the stated
maturity date of the Convertible Debentures. Upon
the termination of any Extension Period and the
payment of all amounts then due, the Company may
commence a new Extension Period, subject to the
preceding sentence. No interest shall be due and
payable during an Extension Period until the end of
such period. During an Extension Period, the
Company and its subsidiaries (other than its
wholly-owned subsidiaries) will be prohibited from
paying dividends on any class of their
</TABLE>
9
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<TABLE>
<S> <C>
preferred or common stock (except for (i) dividends
or distributions in shares of Company Common Stock
on Company Common Stock or on its Preferred Stock,
(ii) purchases or acquisitions of shares of Company
Common Stock made in connection with employee
benefit plans of the Company or its subsidiaries in
the ordinary course of business or purchases made
from employees or officers pursuant to employment
agreements, subject to certain limitations, (iii)
conversions or exchanges of common stock of one
class into common stock of another class, and (iv)
purchases of fractional interests in shares of the
Company's capital stock pursuant to the conversion
or exchange provisions of any of the Company's
securities being converted or exchanged) and making
certain other restricted payments until quarterly
interest payments are resumed and all accumulated
and unpaid interest (including any interest
thereon) on the Convertible Debentures is made
current. The Convertible Debentures have provisions
with respect to interest, optional redemption and
conversion into the Company Common Stock and
certain other terms substantially similar to those
of the Preferred Securities. See "Description of
the Convertible Debentures."
Form of Preferred Securities........... Beneficial interests in the Preferred Securities
resold pursuant to this Prospectus will be
evidenced by, and transfers thereof will be
effected only through, records maintained by DTC
(as defined herein) in a single, permanent global
security bearing a CUSIP number distinct from the
CUSIP number for the Preferred Securities issued in
the Original Offering and the Over-Allotment
Offering. Except under the limited circumstances
described herein, Preferred Securities in
certificated form will not be issued in exchange
for an interest in the global certificate or
certificates. In the event of a transfer of
securities that were initially issued in fully
registered, certificated form, the holder of such
certificates will be required to exchange them for
interests in the global certificates representing
the number of Preferred Securities transferred. See
"Description of the Preferred
Securities--Book-Entry Only Issuance--The
Depository Trust Company."
Use of Proceeds........................ The Selling Holders will receive all of the
proceeds from the sale of the Offered Securities.
Neither Vanstar nor the Trust will receive any
proceeds from the sale of the Offered Securities.
Trading................................ The Company Common Stock is listed on the NYSE
under the symbol "VST." Prior to the resale of the
Preferred Securities pursuant to this Prospectus,
each of the Preferred Securities was eligible for
trading in the
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
PORTAL Market. Preferred Securities resold pursuant
to this Prospectus will no longer be eligible for
trading in the PORTAL Market. The Company and the
Trust do not currently intend to list the Preferred
Securities resold pursuant to this Prospectus on
any securities exchange or to seek approval for
quotation through any automated quotation system.
Accordingly, there can be no assurance as to the
development or liquidity of any market for the
Preferred Securities resold under this Prospectus.
Risk Factors........................... An investment in the Offered Securities involves a
high degree of risk. See "Risk Factors" for a
discussion of certain factors that should be
considered in evaluating an investment in the
Offered Securities.
</TABLE>
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<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below (other than the
unaudited information as of and for the six months ended October 31, 1995 and
1996) have been derived from the consolidated audited financial statements of
the Company for the periods indicated. The summary unaudited consolidated
financial information as of and for the six months ended October 31, 1995 and
1996, in the opinion of management, reflects all adjustments, consisting only of
a normal recurring nature, necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for interim periods.
The consolidated operating results for the six months ended October 31, 1996 are
not necessarily indicative of the results which may be expected for the full
fiscal year ending April 30, 1997. All of the following information should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements (including the Notes thereto) appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEVEN FISCAL YEAR ENDED SIX MONTHS ENDED OCTOBER
SEPTEMBER 30, MONTHS APRIL 30, 31,
-------------------- ENDED APRIL -------------------- ------------------------
1992 1993 30, 1994 1995 1996 1995 1996
--------- --------- ----------- --------- --------- --------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue................................. $ 787,798 $1,099,813 $ 586,514 $1,385,392 $1,804,813 $ 872,297 $ 1,102,823
Cost of revenue......................... 696,518 921,789 489,512 1,174,854 1,559,886 751,050 943,420
Gross margin............................ 91,280 178,024 97,002 210,538 244,927 121,247 159,403
Selling, general and administrative
expenses.............................. 158,644 181,320 97,436 182,411 201,880 93,134 116,237
Operating income (loss)................. (76,272) (3,296) (434) 28,127 43,047 28,113 43,166
Interest expense, net................... 20,242 22,196 11,181 25,978 30,265 (14,994) (9,088)
Income (loss) before income taxes and
distributions on convertible preferred
securities of trust................... (54,228) (18,751) (6,969) 1,268 8,053 34,078 13,119
Distributions on convertible preferred
securities of trust, net of tax....... -- -- -- -- -- -- (629)
Income from discontinued operations..... 2,261 14,505 51,474 -- 9,194 -- --
Net income (loss)....................... (51,967) (4,246) 44,505 1,268 17,247 8,265 20,840
Earnings per share (1):
Continuing operations................. 0.04 0.23 0.25 0.49
Discontinued operations............... -- 0.27 -- --
Total earnings per share............ 0.04 0.50 0.25 0.49
Ratio of earnings to fixed charges
(2)................................... -- -- -- 1.06x 1.32x 3.47x
<CAPTION>
OCTOBER 31, 1996
------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital......................... $ 231,358
Total assets............................ 843,258
Current maturities of long-term debt.... 2,365
Long-term debt, less current
maturities............................ 3,337
Company-obligated mandatorily redeemable
convertible preferred securities of
subsidiary trust holding solely
convertible subordinated debt
securities of the Company (3)......... 194,561
Total stockholders' equity.............. 155,349
</TABLE>
- ------------------------------
(1) Earnings per share for the six months ended October 31, 1995 and the fiscal
years ended April 30, 1995 and 1996 give effect to the conversion of all
outstanding shares of Preferred Stock and Class B Common Stock into Company
Common Stock and the exchange of all outstanding warrants for shares of
Company Common Stock in connection with the Company's initial public
offering occurring March 11, 1996 as if the conversion had occurred at the
later of the beginning of the period or the issuance date.
(2) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before provision for income taxes, discontinued operations,
extraordinary items and fixed charges, less capitalized interest by (y)
fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt expense and discount or premium related to indebtedness
and the interest element of rental expense. Earnings were inadequate to
cover fixed charges for the fiscal years ended September 30, 1992 and 1993
and the seven months ended April 30, 1994 in the amount of $96.5 million,
25.5 million and 11.6 million, respectively.
(3) The sole asset of the Trust is $207,474,200 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2016.
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<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE OFFERED SECURITIES. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD
LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE
NOT LIMITED TO, THOSE DISCUSSED BELOW. SEE "SAFE HARBOR STATEMENT UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995."
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 timing of major service projects, inventory adjustments,
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 and interest rates.
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. Future limitations of credit by vendors could have a material adverse
effect on the Company. In addition, the general availability of certain
products, particularly state of the art computing and data communications
products, is occasionally restricted. While the Company has not historically
experienced significant product supply shortages, other than due to credit
restrictions as described above, any such shortages in the future could have a
material adverse effect on the Company. The Company is increasing its fixed
operating expenses, including a significant increase in personnel, based on
anticipated revenue growth. To the extent that increased personnel expenses are
incurred prior to related increases in revenues, the Company's operating results
may be adversely affected. In addition, in the event that the growth in the
Company's business does not meet its expectations, the Company may be unable to
adjust its spending levels rapidly enough to avoid an adverse effect upon
operating results. Accordingly, the Company believes that 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. It is
possible that in certain future periods, the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company Common Stock would likely be materially adversely
affected. See "Summary--Summary Consolidated Financial Data," "--Dependence on
Key Vendors and Product Supply," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED HISTORY OF PROFITABILITY; UNCERTAINTY OF FUTURE RESULTS
The Company has a limited history of profitability. The Company experienced
operating losses in the fiscal years ended September 30, 1992 and 1993 and
during the seven months ended April 30, 1994. The Company generated operating
income in fiscal 1995 and 1996 and for the six months ended October 31, 1996.
The Company derives its revenues from four primary sources: products,
professional services (formerly networking), life cycle services (formerly
support services) and other services. The Company has recently increased the
focus of its business on the provision of professional and life cycle services
and
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<PAGE>
expects to derive an increasingly larger portion of its operating income from
the provision of such services. If the Company is not successful in implementing
its strategy of focusing on sales of services, the Company's operating margins
could decline and its ability to maintain profitability could be materially
adversely affected. There can be no assurance that the Company will be able to
sustain profitability on a quarterly or annual basis in the future. See
"Summary--Summary Consolidated Financial Data," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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. Since 1986, the Company has funded
its working capital requirement through its Financing Program Agreement (the
"Financing Program Agreement") with IBMCC. At October 31, 1996, the outstanding
principal balance under the Financing Program Agreement was approximately $245.7
million, out of a total of $300 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, 1997 and is renewable thereafter for successive
six-month periods. The Financing Program Agreement also restricts the ability of
the Company to redeem the Convertible Debentures and the ability of the Trust to
redeem the Preferred Securities, even upon the occurrence of a Tax Event (as
defined below). See "--Limitations of Redemption of Debentures." IBMCC may
terminate the Financing Program Agreement at any time upon 90 days' notice to
the Company. In the event of such termination, the outstanding borrowings under
the Financing Program Agreement mature at the end of the term of the line of
credit.
As part of the Company's refinancing plan, the Company used an aggregate of
$300.7 million from the Original Offering, the Over-Allotment Offering and the
Securitization Facility (as defined herein) to reduce the Company's outstanding
indebtedness under the Financing Program Agreement. Approximately $82.0 million
remained outstanding under such facility as of December 31, 1996, out of a total
of $275 million in available credit on such date. See "Recent Developments."
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.
Borrowings under the Financing Program Agreement currently bear interest at
the average of the prime rate announced by Citibank, N.A., The Chase Manhattan
Bank, N.A. and Bank of America National Trust and Savings Association (the
"Prime Rate") minus 0.50% (7.75% at October 31, 1996). As a result, the
Company's operating results are sensitive to changes in the Prime Rate. An
increase in the Prime Rate could have a material adverse effect on the Company's
financial condition and results of operations. In addition, there can be no
assurance that the Company will be able to generate sufficient operating cash
flow to cover required interest and principal payments when due. If the Company
is unable to meet interest and principal payments in the future, it may,
depending upon the circumstances, seek additional equity or debt financing or
attempt to refinance its existing indebtedness, certain of which transactions
could be dilutive to the holders of the Company Common Stock. There can be no
assurance that sufficient equity or debt financing will be available at all or
on terms acceptable to the Company. If the Company were unable to obtain any
required alternative or additional financing, it would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company currently has substantial fixed obligations (including
indebtedness) in relation to its stockholders' equity and there can be no
assurance that the Company's operating results will be sufficient for payment of
all of its fixed obligations. The degree to which the Company is leveraged could
have important consequences to holders of the Preferred Securities, including
the following: (i) the Company's ability to obtain other financing in the future
may be impaired; (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;
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<PAGE>
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. The Indenture does not limit the amount of additional indebtedness that
the Company or any of its subsidiaries can create, incur, assume or guarantee.
RANKING OF OBLIGATIONS UNDER GUARANTEE AND CONVERTIBLE DEBENTURES
The Company's obligations under the Guarantee rank (i) subordinate and
junior to all other liabilities of the Company except any liabilities that may
be PARI PASSU expressly by their terms, (ii) PARI PASSU in right of payment with
the most senior preferred stock issued from time to time by the Company and with
any guarantee now or hereafter entered into by the Company in respect of any
preferred or preference stock or preferred securities of any affiliate of the
Company and (iii) senior to the Company Common Stock. The obligations of the
Company under the Convertible Debentures are subordinate and junior in right of
payment to Senior Indebtedness of the Company. No payment of principal of
(including redemption payments, if any), premium, if any, or interest on, the
Convertible Debentures may be made if (i) any Senior Indebtedness of the Company
is not paid when due and any applicable grace period with respect to such
default has ended and such default has not been cured or waived, ceased to exist
or (ii) the maturity of any Senior Indebtedness of the Company has been
accelerated because of a default. At November 30, 1996, Senior Indebtedness of
the Company aggregated approximately $111.1 million. There are no terms of the
Preferred Securities, the Convertible Debentures or the Guarantee that limit the
ability of the Company or its subsidiaries to incur additional indebtedness or
liabilities, including indebtedness or liabilities that would rank senior or
effectively senior to the Convertible Debentures and the Guarantee. See
"Description of the Guarantee--Status of the Guarantee; Subordination" and
"Description of the Convertible Debentures--Subordination."
RESTRICTIVE COVENANTS
The Financing Program Agreement with IBMCC contains significant financial
covenants. The Company's ability to meet such covenants is dependent on its
financial and operating performance, which is subject, at least in part, to
prevailing economic conditions and to financial, business and other factors
beyond its control. There can be no assurance that financial results that comply
with the restrictive covenants and financial tests in the Financing Program
Agreement will be achieved, and the Company's inability to satisfy these
covenants, if not waived by IBMCC, could result in a default under such
financing arrangement. In the event of such a default, IBMCC could elect to
declare all amounts borrowed, together with accrued and unpaid interest, due and
payable. If the Company were unable to pay such amounts, IBMCC could proceed
against any collateral securing the obligations due to it. If such indebtedness
were to be accelerated, there can be no assurance that the assets of the Company
would be sufficient to repay in full such indebtedness and other indebtedness of
the Company or to pay principal of and interest on the Convertible Debentures in
order for the Trust to meet its obligations under the Preferred Securities.
LIMITATIONS ON REDEMPTION OF DEBENTURES
The Company's ability to redeem the Convertible Debentures for cash, either
in connection with an optional redemption on or after October 5, 1999 or in
certain circumstances in connection with a Tax Event, is subject to limitations.
There can be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the applicable
redemption price for the Convertible Debentures. In addition, the terms of the
Company's Financing Program Agreement with IBMCC presently prohibit the Company
from redeeming the Convertible Debentures for cash, even following the
occurrence of a Tax Event. In the event a cash redemption by the Company
following a Tax Event were to be prohibited by the terms of the Financing
Program Agreement, the Company would be
15
<PAGE>
required to bear the burden of the change in tax treatment that triggered the
Tax Event. Any future financing arrangement to which the Company becomes a party
may contain a similar prohibition. See "--Substantial Indebtedness and Fixed
Obligations; Dependence on IBMCC; Interest Rate Sensitivity."
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES
The Company has the right under the Indenture to defer interest payments
from time to time on the Convertible Debentures for successive periods not
exceeding 20 consecutive quarterly interest periods during which no interest
shall be due and payable, PROVIDED, that no such Extension Period may extend
beyond the maturity date of the Convertible Debentures. Upon the termination of
any Extension Period and the payment of all amounts then due, the Company may
select a new Extension Period, subject to the requirements described herein. As
a consequence of such extension, quarterly distributions on the Preferred
Securities would be deferred (although such distributions would continue to
accrue with interest thereon compounded quarterly) by the Trust during any such
Extension Period. In the event that this right is exercised, then, during such
period the Company (i) may not, and shall not allow any of its subsidiaries
(other than its wholly-owned subsidiaries) to, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of their capital stock (except for (a)
dividends or distributions in shares of Company Common Stock on Company Common
Stock or on its Preferred Stock, (b) purchases or acquisitions of shares of
Company Common Stock made in connection with employee benefit plans of the
Company or its subsidiaries in the ordinary course of business or pursuant to
employment agreements with officers or employees of the Company or its
subsidiaries (subject to certain limitations), (c) conversions or exchanges of
common stock of one class into common stock of another class and (d) purchases
of fractional interests in shares of the Company's capital stock pursuant to the
conversion or exchange provisions of any of the Company's securities being
converted or exchanged), (ii) may not, and shall not allow any of its
subsidiaries to, make any payment of interest, principal or premium, if any, on
or repay, repurchase or redeem any debt securities issued by the Company that
rank PARI PASSU with or junior to the Convertible Debentures, and (iii) may not,
and shall not allow any of its subsidiaries to, make any guarantee payments with
respect to the foregoing. Prior to the termination of any such Extension Period,
the Company may further extend the Extension Period; PROVIDED, that such
Extension Period, together with all previous and further extensions thereof, may
not exceed 20 consecutive quarters and that such Extension Period may not extend
beyond the maturity date of the Convertible Debentures. Consequently, there
could be multiple Extension Periods of varying lengths throughout the term of
the Convertible Debentures. See "Description of the Preferred Securities--
Distributions" and "Description of the Convertible Debentures--Option to Extend
Interest Payment Period."
Should the Company exercise the right to defer payments of interest on the
Convertible Debentures, each holder of Preferred Securities will continue to
accrue income (as original issue discount) in respect of the deferred interest
allocable to its Preferred Securities for United States Federal income tax
purposes, which will be allocated but not distributed to holders of record of
Preferred Securities. As a result, each such holder of Preferred Securities will
recognize income for United States Federal income tax purposes in advance of the
receipt of cash and will not receive the cash from the Trust related to such
income if such holder disposes of its Preferred Securities prior to the record
date for the date on which distributions of such amounts are made. Moreover, if
a holder of Preferred Securities converts its Preferred Securities into Company
Common Stock during any Extension Period, the holder will not receive any cash
related to the deferred distributions. Should the Company determine to exercise
such right in the future, the market price of the Preferred Securities is likely
to be affected. A holder that disposes of or converts its Preferred Securities
during any Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. In
addition, as a result of the existence of the right to defer interest payments,
the market price of the Preferred Securities (which represent an undivided
beneficial interest in the Convertible Debentures) may be more volatile than
other similar securities where
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<PAGE>
the issuer does not have such rights to defer interest payments. See "Certain
United States Federal Income Tax Considerations--Potential Extension of Interest
Payment Period and Original Issue Discount."
PROPOSED TAX LEGISLATION
On March 19, 1996, as part of President Clinton's Fiscal 1997 Budget
Proposal, the Treasury Department proposed legislation (the "Proposed
Legislation") that, among other things, would treat as equity for United States
Federal income tax purposes instruments with a maximum term of more than 20
years that are not shown as indebtedness on the consolidated balance sheet of
the issuer. On March 29, 1996, Senate Finance Committee Chairman William V.
Roth, Jr. and House Ways and Means Committee Chairman Bill Archer issued a joint
statement (the "Joint Statement") indicating their intent that certain
legislative proposals initiated by the Clinton administration, including the
Proposed Legislation, that may be adopted by either of the tax-writing
committees of Congress, would have an effective date that is no earlier than the
date of "appropriate Congressional action." Based on the Joint Statement, it is
expected that if the Proposed Legislation were enacted, such legislation would
not apply to the Convertible Debentures since they were issued prior to the date
of any "appropriate Congressional action." There can be no assurance, however,
that any proposed legislation enacted after the date hereof will not otherwise
adversely affect the tax treatment of the Convertible Debentures. If legislation
is enacted that adversely affects the tax treatment of the Convertible
Debentures, such legislation could result in the distribution of the Convertible
Debentures to holders of the Preferred Securities or, in certain limited
circumstances, the redemption of the Convertible Debentures by the Company and
the distribution of the resulting cash in redemption of the Preferred
Securities. See "Description of the Preferred Securities--Special Event
Redemption or Distribution."
RIGHTS UNDER THE GUARANTEE
The Guarantee Trustee (as defined herein) will hold the Guarantee for the
benefit of the holders of the Preferred Securities. The Guarantee guarantees to
the holders of the Preferred Securities the payment of (i) any accrued and
unpaid distributions that are required to be paid on the Preferred Securities,
to the extent the Trust has funds available therefor, (ii) the applicable
redemption price with respect to the Preferred Securities called for redemption
by the Trust, to the extent the Trust has funds available therefor, and (iii)
upon a voluntary or involuntary dissolution, winding up or termination of the
Trust (other than in connection with a distribution of the Convertible
Debentures to holders of Preferred Securities or a redemption of all of the
Preferred Securities), the lesser of (a) the aggregate of the liquidation amount
and all accrued and unpaid distributions on the Preferred Securities to the date
of payment, to the extent the Trust has funds available therefor, and (b) the
amount of assets of the Trust remaining available for distribution to holders of
the Preferred Securities upon the liquidation of the Trust. The holders of a
majority in liquidation amount of the Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee or to direct the exercise of any trust or
power conferred upon the Guarantee Trustee under the Guarantee. Notwithstanding
the foregoing, any holder of Preferred Securities may directly institute a legal
proceeding directly against the Company to enforce the obligations of the
Guarantor under the Guarantee without first instituting a legal proceeding
against the Trust, the Guarantee Trustee, or any other person or entity. If the
Company were to default on the obligation to pay amounts payable on the
Convertible Debentures, the Trust would lack available funds for the payment of
distributions or amounts payable on redemption of the Preferred Securities or
otherwise, and in such event holders of the Preferred Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, a holder
of the Preferred Securities would be required to rely on the enforcement (1) by
the Property Trustee (as defined herein) of its rights, as registered holder of
the Convertible Debentures, against the Company pursuant to the terms of the
Convertible Debentures or (2) by such holder of Preferred Securities of its
right against the Company to enforce payments on the Convertible Debentures. See
"Description of the Guarantee" and "Description
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of the Convertible Debentures." The Declaration provides that each holder of
Preferred Securities, by acceptance thereof, agrees to the provisions of the
Guarantee and the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF PREFERRED SECURITIES
If a Declaration Event of Default (as defined herein) occurs and is
continuing, then the holders of Preferred Securities would rely on the
enforcement by the Property Trustee of its rights as the sole holder of the
Convertible Debentures against the Company. In addition, the holders of a
majority in liquidation amount of the Preferred Securities will have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Property Trustee or to direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee to exercise the remedies available to it
under the Indenture as a holder of the Convertible Debentures. If the Property
Trustee fails to enforce its rights under the Convertible Debentures, any holder
of Preferred Securities may directly institute a legal proceeding against the
Company to enforce the Property Trustee's rights under the Convertible
Debentures without first instituting any legal proceeding against the Property
Trustee or any other person or entity. Notwithstanding the foregoing, if a
Declaration Event of Default has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest or principal on the
Convertible Debentures on the date such interest or principal is otherwise
payable (or in the case of redemption, on the redemption date), then a holder of
Preferred Securities may directly institute a proceeding for enforcement of
payment to such holder of the principal of or interest on the Convertible
Debentures having a principal amount equal to the aggregate liquidation amount
of the Preferred Securities of such holder (a "Direct Action") on or after the
respective due date specified in the Convertible Debentures. In connection with
such Direct Action, the Company will be subrogated to the rights of such holder
of Preferred Securities under the Declaration to the extent of any payment made
by the Company to such holder of Preferred Securities in such Direct Action. The
holders of Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Convertible Debentures. See "Vanstar
Financing Trust."
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
Upon the occurrence of a Tax Event or an Investment Company Act Event (each
as defined herein, and each, a "Special Event"), the Trust will be dissolved,
except in the limited circumstance described below, with the result that the
Convertible Debentures would be distributed to the holders of the Trust
Securities in connection with the liquidation of the Trust. In certain
circumstances, the Company shall have the right to redeem the Convertible
Debentures, in whole (but not in part), in lieu of a distribution of the
Convertible Debentures by the Trust, in which event the Trust will redeem the
Preferred Securities. See "Description of the Preferred Securities--Special
Event Redemption or Distribution."
Under current United States Federal income tax law, a distribution of
Convertible Debentures upon the dissolution of the Trust would not be a taxable
event to holders of the Preferred Securities. Upon the occurrence of a Special
Event, however, a dissolution of the Trust in which holders of the Preferred
Securities receive cash would be a taxable event to such holders. See
"Taxation--Receipt of Convertible Debentures or Cash Upon Liquidation of the
Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Convertible Debentures that may be distributed in exchange for
Preferred Securities if a dissolution or liquidation of the Trust were to occur.
Accordingly, the Preferred Securities that an investor may purchase, or the
Convertible Debentures that a holder of Preferred Securities may receive on
dissolution and liquidation of the Trust, may trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
Because holders of Preferred Securities may receive Convertible Debentures upon
the occurrence of a Special Event, prospective purchasers of Preferred
Securities also are making an investment decision with regard to the Convertible
Debentures and should carefully review all the information
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regarding the Convertible Debentures contained herein. See "Description of the
Preferred Securities-- Special Event Redemption or Distribution" and
"Description of the Convertible Debentures--General."
RELATIONSHIP WITH MERISEL FAB, INC.
The Company provides product distribution services to franchisees and
affiliates of Merisel FAB, Inc. ("Merisel FAB") for a fee through its
distribution centers pursuant to a distribution services agreement entered into
in connection with the sale of the Company's United States franchise business to
Merisel FAB in January 1994. Merisel FAB is a wholly-owned subsidiary of
Merisel, Inc. ("Merisel") whose common stock is publicly traded (Nasdaq: MSEL)
and whose 12.5% senior notes were downgraded from B to CCC+ on April 1, 1996 and
to CCC- on August 16, 1996 by Standard & Poors Corporation. Merisel reported
losses of $2.82 and $4.75 per share for the fiscal year ended December 31, 1995
and the nine months ended September 30, 1996, respectively. Merisel announced
that it has engaged a financial advisor to assist in assessing its strategic
options in order to maximize stockholder value and that it is negotiating with
its lenders regarding potential non-compliance with certain financial covenants
under certain of its loan agreements. Merisel has guaranteed Merisel FAB's
obligations under the distribution services agreement. The distribution services
agreement expires in April 1997. Approximately 40% of the Company's inventory
shipments by dollar volume are made to satisfy its obligations under the
distribution services agreement. For the seven months ended April 30, 1994, the
fiscal year ended April 30, 1995, the fiscal year ended April 30, 1996 and the
six months ended October 31, 1996, revenues derived from Merisel FAB were
approximately $6.1 million, $25.0 million, $21.3 million, and $11.1 million
respectively, representing approximately 1.0%, 1.8%, 1.2%, and 1.0%,
respectively, of total revenue for such periods. Pursuant to its agreement with
the Company, Merisel FAB is obligated to pay the Company for its daily purchases
within two business days, as a result of which the Company typically carries a
receivable balance from Merisel FAB of approximately $9.0 million. Any further
deterioration in the business of Merisel FAB's franchisees and affiliates or in
Merisel FAB's or Merisel's financial condition, including operating losses of
Merisel that may continue beyond its third quarter of 1996, could materially
adversely affect the Company's ability to sell the inventory it holds to satisfy
its obligations under the Merisel distribution and services agreement which
would have a material adverse effect on the Company's financial condition and
results of operations, and could adversely affect the Company's "other services"
revenue. See "--Inventory Management."
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. The Company employs over 3,500 technical
professionals and has expanded its systems engineering force from approximately
200 in March 1994 to approximately 1,200 in November 1996. 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. See
"Business--Employees" and "Management."
MANAGEMENT OF EXPANDING OPERATIONS AND INCREASED SERVICE FOCUS
The Company's growth resulting from expanding operations and acquisitions
has placed significant demands on the Company's management, operational and
technical resources. Furthermore, the Company has increased the focus of its
business operations on the provision of professional and life cycle services.
Such growth and increased service focus are 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
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depend on its ability to attract, retain and train adequate numbers of technical
field personnel and effectively integrate any acquired business operations. The
failure of the Company to effectively manage its growth and increased service
focus effectively or to train its technical field personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
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 basis, new products and
services that keep pace with technological developments and address increasingly
sophisticated customer requirements. There can be no assurance that the Company
will be successful in identifying, sourcing, developing and marketing product
and service enhancements or new products and services that respond to
technological change, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
product and service enhancements or new products and services, or that its
product and service enhancements and new products and services will adequately
meet the requirements of the marketplace and achieve market acceptance. 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. 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. See "Business--Automated Systems,
Process Methodologies and Technical Personnel."
DEPENDENCE ON KEY VENDORS 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. The Company's agreements with those vendors from which it purchases
products directly, generally contain provisions for periodic renewals and for
termination by the vendor without cause, generally upon relatively short notice.
Although the Company believes its vendor relationships are good, there can be no
assurance that the Company's relationships will continue as presently in effect.
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. As is typical in its industry, the Company receives
credits from most of its vendors for market development, which are used to
offset a portion of the Company's sales and marketing expense. Any change in the
availability of these credits could materially adversely affect the Company's
operating results at least until the Company made appropriate adjustments in its
expense levels. The Company is also dependent, in part, upon vendor financing
for working capital requirements. No assurance can be given that vendor
financing will continue to be available to the Company on satisfactory terms and
conditions, if at all. 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.
The personal computer industry experiences 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. There can be no assurance that vendors will be
able to maintain an adequate supply of products to fulfill the Company's
customer orders on a timely basis. The Company has
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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 or fulfill customer orders on a timely basis could have a material
adverse effect on the Company's business, financial condition and results of
operations.
INVENTORY MANAGEMENT
The personal computer 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 to the Company 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.
Approximately 40% of the Company's inventory shipments by dollar volume are made
to satisfy its obligations under the distribution services agreement with
Merisel FAB. However, virtually all of the inventory maintained by the Company
is not customer specific and the Company believes that such inventory can be
sold through Merisel FAB franchisees or to other customers or other resellers
or, in some cases, returned to the vendor. Any inventory adjustments could
materially adversely affect the Company's financial condition and results of
operations.
CONCENTRATION OF REVENUES
During the fiscal years ended April 30, 1995 and 1996, and the six months
ended October 31, 1996, Microsoft Corporation accounted for 10.8%, 12.0% and
12.6%, respectively, of the Company's total revenues for such fiscal periods.
During such periods, no other customer accounted for more than 10% of the
Company's total revenues. However, during the first six months of fiscal 1997,
the Company derived approximately 52% 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 would materially adversely affect the Company's financial
condition and results of operations. See "Business--Customers."
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
personal computer services marketplace, including Digital Equipment Corporation
MultiVendor Services, Electronic Data Systems Corporation, Hewlett-Packard
Company Multi-Vendor Services and Integrated Systems Solutions Corporation.
Other competitors include VARs, systems integrators and third-party service
companies, including AmeriData Technologies, Inc., CompuCom Systems, Inc.,
DecisionOne, Entex Information Services, InaCom Corp., MicroAge, Inc. and
Technology Service Solutions. 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
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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 or to devote
greater resources to the development, promotion and sale of their products and
services than the Company. No assurance can be given that the Company will be
able to compete successfully against current and future competitors. See
"Business--Competition."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on the Company
Common Stock and does not presently intend to pay cash dividends on its Common
Stock in the foreseeable future. The Company intends to retain future earnings
for reinvestment in its business. In addition, the Company's Financing Program
Agreement with IBMCC limits the Company's ability to pay cash dividends on its
capital stock. See "Market Prices and Dividend Policy."
ACQUISITIONS
As part of its growth strategy, the Company pursues the acquisition of
companies that sell products and services that either complement or expand its
existing business. As a result, the Company continually evaluates potential
acquisition opportunities, some of which may be material in size and scope. The
Company has recently consummated a number of such acquisitions, one or more of
which may require substantial Company resources. See "Recent Developments."
Acquisitions, including those recently consummated, involve a number of special
risks, including the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, the incorporation of
acquired products and services into the Company's offerings, adverse short-term
effects on the Company's operating results, the amortization of acquired
intangible assets, the loss of key employees and the difficulty of presenting a
unified corporate image. There can be no assurance that any of the Company's
past acquisitions can be integrated into the Company's operations successfully.
Although the Company is currently in discussions with several acquisition
candidates, it is not now a party to any binding commitments or agreements to
proceed with regard thereto other than as discussed under "Recent Developments."
The Company anticipates that one or more other acquisition opportunities may
become available in the near future. The Company intends to actively pursue
existing and future acquisition opportunities. No assurance can be given that
the Company will have adequate resources to consummate any acquisition, that any
acquisition by the Company will or will not occur, that if any acquisition does
occur it will not materially adversely affect the Company or that any such
acquisition will be successful in enhancing the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's ability to consummate acquisitions will be limited by the
availability of attractive candidates at appropriate terms, the Company's
capital resources and prevailing economic and market conditions. There can be no
assurance that the Company will be able to consummate any future acquisitions on
a timely basis or that, if consummated, such acquisitions will be integrated
into the Company's operations successfully. Similarly, there can be no assurance
that any such acquisitions will provide the anticipated economic benefits to the
Company.
PROTECTION OF INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary software, systems and processes
through copyright, trademark and trade secret laws and contractual restrictions
on disclosure and copying. Despite such measures, it may be possible for
unauthorized third parties to copy aspects of the Company's software, systems
and processes or to obtain and use information that the Company regards as
proprietary. In addition, no assurance can be given that the protective measures
taken by the Company will be sufficient to preclude competitors from developing
competing or similar proprietary software, systems and processes.
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LIMITED VOTING RIGHTS
Holders of Preferred Securities will have limited voting rights and will not
be entitled to vote to appoint, remove or replace, or to increase or decrease
the number of, the Issuer Trustees. See "Description of the Preferred
Securities--Voting Rights."
ABSENCE OF PUBLIC MARKET FOR THE PREFERRED SECURITIES ON RESALE
Prior to the resale of the Preferred Securities pursuant to this Prospectus,
each of the Preferred Securities was eligible for trading in the PORTAL Market.
Preferred Securities sold pursuant to this Prospectus will no longer be eligible
for trading in the PORTAL Market. Furthermore, the Company and the Trust do not
currently intend to list the Preferred Securities resold pursuant to this
Prospectus on any securities exchange or to seek approval for quotation through
any automated quotation system. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Preferred Securities resold
pursuant to this Prospectus.
Although the Initial Purchasers currently make a market in the Preferred
Securities, they are not obligated to do so and may discontinue such market
making at any time without notice. In addition, such market making activity will
be subject to the limits imposed by the Securities Act and the Exchange Act.
Accordingly, there can be no assurance that any market for the Preferred
Securities will be maintained. If an active market for the Preferred Securities
fails to be sustained, the trading price of such Preferred Securities could be
materially adversely affected.
TRADING CHARACTERISTICS OF PREFERRED SECURITIES
If a trading market for the Preferred Securities resold pursuant to this
Prospectus develops, such securities may trade at prices that do not fully
reflect the value of accrued but unpaid distributions. In addition, as a result
of the right of the Company to defer interest payments, the market price of the
Preferred Securities (which represent undivided interests in the Convertible
Debentures) may be more volatile than other similar securities where the issuer
does not have such right to defer interest payments. A holder who disposes of or
converts its Preferred Securities between record dates for payments of
distributions thereon will be required to include for Federal income tax
purposes accrued but unpaid interest on the Convertible Debentures through the
date of disposition or conversion in income as ordinary income (I.E., original
issue discount), and to add such amount to its adjusted tax basis in its PRO
RATA share of the underlying Convertible Debentures deemed disposed of. To the
extent the selling price is less than the holder's adjusted tax basis (which
will include, in the form of original issue discount, all accrued but unpaid
interest), a holder will recognize a capital loss. Subject to certain limited
exceptions, capital losses cannot be applied to offset ordinary income for
United States Federal income tax purposes. See "Certain United States Federal
Income Tax Considerations."
SHARES SUBJECT TO SALE; POSSIBLE VOLATILITY OF THE PRICE OF THE COMPANY COMMON
STOCK
As of November 29, 1996, there were 41,466,199 shares of the Company Common
Stock outstanding, of which 15,987,571 shares were issued in the Company's IPO
in March 1996 and were tradeable in the public market without restriction unless
acquired by an affiliate of the Company. Of the remaining shares of outstanding
Company Common Stock, approximately 19,786,151 shares became eligible for sale
without registration pursuant to Rule 144 under the Securities Act (the
"Restricted Shares") within the 180 day period subsequent to the effective date
of the IPO. An aggregate of 18,337,864 of such Restricted Shares were subject to
lock-up agreements restricting the sale of such shares, the substantial majority
of which agreements expired or were terminated during the last week of August
1996. Although the sales of certain of the Restricted Shares are subject to
volume and other limitations set forth in Rule 144, which generally restrict the
number of such shares that can be sold and the manner in which they may be sold,
absent other restrictions, such shares may be sold in the public market. In
connection with the Original Offering, the
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directors and certain of the officers and stockholders of the Company holding of
record and beneficially approximately 17,891,840 shares of Company Common Stock
(including shares subject to exercisable options), entered into agreements (the
"New Lock-Ups") restricting their ability to sell or otherwise dispose of shares
of the Company Common Stock or any options to purchase any shares of Company
Common Stock or any securities convertible or exchangeable therefor, without the
prior written consent of Robertson, Stephens & Company LLC. Sales of a
substantial number of shares of Company Common Stock in the public market, or
the perception that such sales could occur, could materially adversely affect
the prevailing market price of the Company Common Stock. The market price of the
Company Common Stock may also be subject to wide fluctuations in price and
volume in response to quarterly variations in the Company's results of
operations, changes in earnings estimates by research analysts, conditions in
the personal computer industry or general market or economic conditions. In
recent years, the stock market has experienced extreme price and volume
fluctuations. These fluctuations have had a substantial effect on the market
prices for many technology companies, and often appear unrelated to the
operating performance of the specific companies involved. Such market
fluctuations could materially adversely affect the market price for the Company
Common Stock. See "Market Prices and Dividend Policy," "Security Ownership of
Principal Stockholders and Management," "Selling Holders," and "Plan of
Distribution."
CONTROL OF THE COMPANY
As of November 29, 1996, Warburg, Pincus Capital Company, L.P. ("CapCo"),
which is controlled by Warburg, Pincus & Co., beneficially owned an aggregate of
13,878,401.21 shares of Company Common Stock (representing approximately 33.5%
of the issued and outstanding shares of Company Common Stock as of such date).
Due to its ownership position, CapCo has significant influence over the
management and policies of the Company and, in turn, the Trust. CapCo's
ownership position also may render it more difficult for a third party to effect
a change of control of the Company without the consent of CapCo and may thereby
discourage third parties from any attempt to acquire control of the Company,
which could have a material adverse effect on the price of the Company Common
Stock. See "Security Ownership of Principal Stockholders and Management."
Moreover, as of November 29, 1996, the principal stockholders, directors and
executive officers of the Company beneficially owned approximately 40.8% of the
Company Common Stock. As a result, such stockholders, if they act in concert,
may be able to effectively control the election of members of the Company's
Board of Directors and generally to exercise control over the Company's
corporate actions. See "Security Ownership of Principal Stockholders and
Management."
ANTI-TAKEOVER EFFECTS OF UNISSUED PREFERRED STOCK AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may be deemed to have an anti-takeover effect. The Company's
Certificate of Incorporation provides that the Board of Directors may issue
additional shares of common stock or establish one or more classes or series of
preferred stock with such designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors deems appropriate without stockholder approval. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Each of the foregoing
provisions gives the Board of Directors, acting without stockholder approval,
the ability to prevent, or render more difficult or costly, the completion of a
takeover transaction that stockholders might view as being in their best
interests, including a takeover transaction that might result in a premium over
the market price for the shares of Company Common Stock.
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THE COMPANY
The Company is a leading provider of services and products designed to build
and manage PC network infrastructures. The Company Common Stock was listed on
the NYSE following its IPO on March 11, 1996 and trades under the symbol "VST."
The Company's current business 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.; and (iv) the 1996 acquisitions of the Dataflex Regions and CDS. In
fiscal 1994, the Company sold its remaining United States franchise business to
Merisel FAB, adopted the name Vanstar Corporation, and changed its fiscal year
end from September 30 to April 30.
The Company was incorporated in Delaware in September 1987 under the name
ComputerLand Corporation following the acquisition by William Y. Tauscher, CapCo
and Richard H. Bard of the majority of the capital stock of the Company's
predecessor, IMS Associates, Inc. ("IMS"), which was originally incorporated in
1976. IMS was merged with the Company after such acquisition. At the time of the
acquisition, the Company operated and franchised computer retail stores in the
United States.
The executive offices of the Company are located at 5964 West Las Positas
Boulevard, Pleasanton, California 94588, and the telephone number of the
executive offices is (510) 734-4000.
VANSTAR FINANCING TRUST
The Vanstar Financing Trust is a statutory business trust formed under
Delaware law pursuant to (i) the Declaration of Trust dated as of September 25,
1996, as amended by the Amended and Restated Declaration of Trust dated as of
October 2, 1996 (the "Declaration") executed by the Company as sponsor of the
Trust, and the trustees of the Trust (the "Issuer Trustees") and (ii) the filing
of a certificate of trust with the Secretary of State of the State of Delaware
on September 25, 1996. The Company owns, directly or indirectly, all of the
Common Securities which have an aggregate liquidation amount equal to 3% of the
total capital of the Trust. The Common Securities of the Trust rank PARI PASSU,
and payments will be made thereon PRO RATA, with the Preferred Securities,
except that, upon the occurrence and during the continuance of an event of
default under the Declaration, the rights of the holders of the Common
Securities to payment in respect of distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Preferred Securities. The assets of the Trust consist entirely of the
Convertible Debentures. The Trust exists for the exclusive purpose of (i)
issuing and selling the Trust Securities representing undivided beneficial
interests in the assets of the Trust, (ii) investing the gross proceeds of the
Preferred Securities in the Convertible Debentures and (iii) engaging in only
those other activities necessary or incidental thereto.
Pursuant to the Declaration, the number of Issuer Trustees is currently
five. Three of the Issuer Trustees (the "Regular Trustees") are individuals who
are employees or officers of or who are otherwise affiliated with the Company.
The fourth trustee is a financial institution that is unaffiliated with the
Company (the "Property Trustee"). The fifth trustee is an entity unaffiliated
with the Company that maintains its principal place of business in the State of
Delaware (the "Delaware Trustee"). The Property Trustee also serves as Delaware
Trustee. Jeffrey S. Rubin, Leslie J. Alvarez and John J. Dunican, Jr. currently
serve as the Regular Trustees. Wilmington Trust Company, a Delaware banking
corporation, currently acts as Property Trustee and as Delaware Trustee and will
continue in such capacities until, in each case, removed or replaced by the
holder of the Common Securities. Wilmington Trust Company also currently acts as
trustee under the Guarantee (the "Guarantee Trustee") and as trustee under the
Indenture (the "Indenture Trustee").
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The Property Trustee holds title to the Convertible Debentures for the
benefit of the holders of the Trust Securities, and the Property Trustee has the
power to exercise all rights, powers and privileges under the Indenture as the
holder of the Convertible Debentures. In addition, the Property Trustee
maintains exclusive control of a segregated non-interest bearing bank account
(the "Property Account") to hold all payments made in respect of the Convertible
Debentures for the benefit of the holders of the Trust Securities. The Guarantee
Trustee holds the Guarantee for the benefit of the holders of the Preferred
Securities. The Company, as the holder of all the Common Securities, currently
has the right to appoint, remove or replace any of the Issuer Trustees and to
increase or decrease the number of trustees; PROVIDED that the number of
trustees shall be at least three; PROVIDED, FURTHER that at least one trustee
shall be a Delaware Trustee, at least one trustee shall be a Property Trustee
(which may also be the Delaware Trustee) and at least one trustee shall be a
Regular Trustee. The Company has agreed to pay all fees and expenses related to
the Trust and the offering of the Preferred Securities. See "Description of the
Convertible Debentures."
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are as set forth in the
Declaration and the Delaware Business Trust Act, as amended (the "Trust Act").
See "Description of the Preferred Securities." The Declaration, the Indenture
and the Guarantee also incorporate by reference the terms of the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The Declaration, the
Indenture and the Guarantee were qualified under the Trust Indenture Act upon
effectiveness of the Registration Statement to which this Prospectus forms a
part.
The place of business and the telephone number of the Trust are the
principal executive offices and telephone number of the Company. See "The
Company."
ACCOUNTING TREATMENT
For financial reporting purposes, the Trust is treated as a subsidiary of
the Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. The Preferred Securities are
presented as a separate line item in the consolidated balance sheet of the
Company entitled "Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust holding solely convertible subordinated debt
securities of the Company" and appropriate disclosures about the Preferred
Securities, the Guarantee and the Convertible Debentures are included in the
notes to the Company's consolidated financial statements. For financial
reporting purposes, the Company records distributions payable on the Preferred
Securities as a financing charge to earnings in the Company's consolidated
statement of income.
26
<PAGE>
MARKET PRICES AND DIVIDEND POLICY
The Company Common Stock began trading publicly on the NYSE under the symbol
"VST" effective March 11, 1996. The following table sets forth, for the periods
indicated, the range of high and low closing sales prices for the Company Common
Stock on the NYSE since March 11, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal Year Ended April 30, 1996
Fourth Quarter (March 11, 1996 through April 30, 1996)......................... $15 $ 9 3/8
Fiscal Year Ending April 30, 1997
First Quarter.................................................................. 17 1/8 13 3/4
Second Quarter................................................................. 29 16 3/4
Third Quarter (through January 9, 1997)........................................ 28 21 3/4
</TABLE>
As of December 20, 1996, there were approximately 291 holders of record of
the Company Common Stock. On January 9, 1997, the closing price reported on the
NYSE for the Company Common Stock was $21 3/4 per share.
The Company has never declared or paid any cash dividends on the Company
Common Stock and does not presently intend to pay cash dividends on the Company
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 Company Common Stock. See "Risk Factors--Restrictive
Covenants." Any determination to declare or pay cash dividends in the future
will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at the time by the
Company's Board of Directors.
Distributions on the Preferred Securities have accrued from the Original
Offering Date and are payable at the annual rate of 6 3/4% of the liquidation
amount of $50 per Preferred Security. Subject to the Company's right to defer
interest payments on the Convertible Debentures and the attendant deferral of
distributions on the Preferred Securities, distributions on the Preferred
Securities will be payable quarterly in arrears on each January 1, April 1, July
1 and October 1. The first distribution on the Preferred Securities was paid
January 2, 1997. In the event the Company's interest payment deferral option is
exercised, then, during such period, the Company may not, among other things,
declare or pay dividends on, or make distributions with respect to, its capital
stock except dividends or distributions in shares of Company Common Stock on
Company Common Stock or on its Preferred Stock.
27
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at October 31, 1996. This table should be read
in conjunction with the Consolidated Financial Statements (including the Notes
thereto) appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31,
1996
---------------
<S> <C>
(IN THOUSANDS,
EXCEPT SHARE
DATA)
Cash and cash equivalents........................................................................ $ 12,090
---------------
---------------
Current maturities of long-term debt............................................................. 2,365
Long-term debt, less current maturities.......................................................... 3,337
---------------
Total long-term debt......................................................................... 5,702
---------------
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trust
holding solely convertible subordinated debt securities of the Company(1)...................... 194,561
Stockholders' equity:
Common stock; $.001 par value; 100,000,000 shares authorized, 41,465,250 shares issued and
outstanding.................................................................................. 41
Additional paid-in capital..................................................................... 122,552
Retained earnings.............................................................................. 32,756
---------------
Total stockholders' equity................................................................... 155,349
---------------
Total capitalization....................................................................... $ 355,612
---------------
---------------
</TABLE>
- ------------------------
(1) For financial reporting purposes, the Trust is treated as a subsidiary of
the Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. Transactions between the
Company and the Trust, including those relating to the Convertible
Debentures, are eliminated for consolidated financial reporting. See
"Accounting Treatment." The sole asset of the Trust is $207,474,200
aggregate principal amount of the Company's 6 3/4% Convertible Subordinated
Debentures due 2016.
28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
April 30, 1996 and 1995, and the seven months ended April 30, 1994, and the year
ended September 30, 1993 were derived from the audited consolidated financial
statements, which are included elsewhere in this Prospectus. The selected
consolidated financial data presented below for the years ended September 30,
1992 and 1991 were derived from audited consolidated financial statements of the
Company, which are not included in this Prospectus. The selected consolidated
financial data presented below for the six months ended October 31, 1995 and
1996 are unaudited but have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, includes
all adjustments, consisting only of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial information
set forth therein. The results of operations for the six months ended October
31, 1996 are not necessarily indicative of results that may be expected for the
Company's fiscal year ending April 30, 1997. This selected consolidated
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 (including the Notes thereto) appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR ENDED SEPTEMBER MONTHS FISCAL YEAR ENDED SIX MONTHS ENDED
30, ENDED APRIL 30, OCTOBER 31,
------------------------------ APRIL 30, ---------------------- ---------------------
1991 1992 1993 1994 1995 1996 1995 1996
-------- -------- ---------- --------- ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
Income Statement Data:
Revenue............................... $213,738 $787,798 $1,099,813 $ 586,514 $1,385,392 $1,804,813 $872,297 $ 1,102,823
Cost of revenue....................... 180,141 696,518 921,789 489,512 1,174,854 1,559,886 751,050 943,420
Gross margin.......................... 33,597 91,280 178,024 97,002 210,538 244,927 121,247 159,403
Selling, general and administrative
expenses............................ 48,485 158,644 181,320 97,436 182,411 201,880 93,134 116,237
Operating income (loss)............... (14,888) (76,272) (3,296) (434) 28,127 43,047 28,113 43,166
Interest expense, net................. 11,019 20,242 22,196 11,181 25,978 30,265 (14,994) (9,088)
Income (loss) before income taxes and
distributions on convertible
preferred securities of trust....... (15,803) (54,228) (18,751) (6,969) 1,268 8,053 34,078 13,119
Distributions on convertible preferred
securities of trust, net of tax..... -- -- -- -- -- -- -- (629)
Income from discontinued operations... 25,320 2,261 14,505 51,474 -- 9,194 -- --
Net income (loss)..................... 9,517 (51,967) (4,246) 44,505 1,268 17,247 8,265 20,840
Earnings per share (1):
Continuing operations............... 0.04 0.23 0.25 0.49
Discontinued operations............. -- 0.27 -- --
Total earnings per share.......... 0.04 0.50 0.25 0.49
Shares used in computing earnings per
share (1)........................... 32,486 34,250 33,029 42,440
Ratio of earnings to fixed charges
(2)................................. -- -- -- 1.06x 1.32x 3.47x
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
--------------------------------- --------------------
1991 1992 1993 1994 1995
--------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance Sheet Data:
Working capital (deficit)......................................... $ (14,554) $ (107,441) $ (114,902) $ (73,511) $ 267,852
Total assets...................................................... 598,730 700,035 576,279 610,458 705,295
Short-term borrowings............................................. 158,124 227,692 194,660 262,783 --
Current maturities of long-term debt.............................. 6,836 14,898 23,190 12,788 7,685
Long-term debt, less current maturities........................... 46,630 32,219 13,017 6,732 337,750
Redeemable preferred stock and accrued dividends.................. 3,559 3,986 4,464 4,777 --
Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust holding solely convertible
subordinated debt securities of the Company (3)................. -- -- -- -- --
Total stockholders' equity........................................ 56,049 684 13,584 24,797 22,589
<CAPTION>
OCTOBER 31,
1996 1996
--------- -----------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)......................................... $ 315,742 $ 231,358
Total assets...................................................... 803,365 843,258
Short-term borrowings............................................. -- 115,625
Current maturities of long-term debt.............................. 1,759 2,365
Long-term debt, less current maturities........................... 293,007 3,337
Redeemable preferred stock and accrued dividends.................. -- --
Company-obligated mandatorily redeemable convertible preferred
securities of subsidiary trust holding solely convertible
subordinated debt securities of the Company (3)................. -- 194,561
Total stockholders' equity........................................ 127,053 155,349
</TABLE>
- ------------------------------
(1) Earnings per share for the six months ended October 31, 1995 and the fiscal
years ended April 30, 1995 and 1996 give effect to the conversion of all
outstanding shares of Preferred Stock and Class B Common Stock into Company
Common Stock and the exchange of all outstanding warrants for shares of
Company Common Stock in connection with the Company's IPO as if the
conversion had occurred at the later of the beginning of the period or the
issuance date.
(2) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before provision for income taxes, discontinued operations,
extraordinary items and fixed charges, less capitalized interest by (y)
fixed charges. Fixed charges consist of interest on all indebtedness,
amortization of debt expense and discount or premium related to indebtedness
and the interest element of rental expense. Earnings were inadequate to
cover fixed charges for the fiscal years ended September 30, 1992 and 1993
and the seven months ended April 30, 1994 in the amount of $96.5 million,
$25.5 million and $11.6 million, respectively.
(3) The sole asset of the Trust is $207,474,200 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2016.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." SEE "SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995."
RESULTS OF OPERATIONS
The Company's four primary sources of revenue are: product, professional
services, life cycle services and other services. The Company refers to the
integration of its product and service offerings designed to provide customized
solutions to support its customers' PC network infrastructure throughout its
life cycle as "Life Cycle Management." Product revenue is primarily derived from
the sale of computer hardware, software, peripherals and communications devices
manufactured by third parties and sold by the Company. During the first quarter
of fiscal year 1997, the Company realigned its service offerings to position
itself to better meet its customers' growing need to gain control of the
management and the escalating cost of distributed computing network
infrastructures. Professional services (formerly networking) revenue is derived
from network installation, enhancement and migration plus consulting services to
plan, design, manage, and implement new client/server technologies. Life cycle
services (formerly support services) revenue is derived from desktop support
services which encompass customized service, enhancement, and support solutions
required as a result of customer's outsourcing the ownership and management of
client/ server environments. Desktop support services integrates the services of
desktop support, help desk, repair and maintenance, asset management, and
desktop installation. Other services revenue is primarily derived from fees
earned on the distribution services agreement with Merisel FAB and training and
education services. Pursuant to the distribution services agreement, the Company
provides product distribution to franchisees and affiliates of Merisel FAB (see
Note 2 of Notes to Consolidated Financial Statements).
The Company disposed of most of its franchise business during 1994. The
largest of these sales occurred on January 31, 1994, when the Company sold
certain assets and liabilities of its United States 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 FAB (see Note 2 of Notes to Consolidated Financial Statements).
In April 1994, the Company changed its fiscal year from September 30 to
April 30. Therefore, the Company is using annualized information for the seven
months ended April 30, 1994 ("1994") for purposes of comparison to the year
ended April 30, 1995 ("1995") and the year ended September 30, 1993 ("1993").
The annualized information for the period ended April 30, 1994 does not
represent actual operating results that would have been achieved for a full
fiscal year.
The following tables set 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
30
<PAGE>
and as a percentage of total revenue and (iii) operating income (loss) in total
and as a percentage of total revenue.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR ENDED SIX MONTHS ENDED
ENDED SEVEN MONTHS APRIL 30, OCTOBER 31,
SEPTEMBER 30, ENDED APRIL ---------------------- ---------------------
1993 30, 1994 1995 1996 1995 1996
------------- ------------ ---------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenue:
Product......................................... $ 935,165 $490,576 $1,187,392 $1,578,298 $763,113 $ 953,122
Services:
Professional services......................... 15,652 9,829 31,842 58,127 24,416 49,298
Life cycle services........................... 143,553 76,785 131,194 138,418 67,515 81,471
Other services................................ 5,443 9,324 34,964 29,970 17,253 18,932
------------- ------------ ---------- ---------- -------- -----------
Total revenue............................... $1,099,813 $586,514 $1,385,392 $1,804,813 $872,297 $ 1,102,823
------------- ------------ ---------- ---------- -------- -----------
------------- ------------ ---------- ---------- -------- -----------
GROSS MARGIN:
Product......................................... $ 110,651 $ 53,261 $ 113,513 $ 147,894 $ 70,797 $ 94,913
Services:
Professional services......................... 7,525 3,291 13,111 23,013 11,237 20,690
Life cycle services........................... 57,320 33,001 55,053 49,131 24,514 29,033
Other services................................ 2,528 7,449 28,861 24,889 14,699 14,767
------------- ------------ ---------- ---------- -------- -----------
Total gross margin.......................... $ 178,024 $ 97,002 $ 210,538 $ 244,927 $121,247 $ 159,403
------------- ------------ ---------- ---------- -------- -----------
------------- ------------ ---------- ---------- -------- -----------
GROSS MARGIN PERCENTAGE:
Product......................................... 11.8% 10.9% 9.6% 9.4% 9.3% 10.0%
Services:
Professional services......................... 48.1% 33.5% 41.2% 39.6% 46.0% 42.0%
Life cycle services........................... 39.9% 43.0% 42.0% 35.5% 36.3% 35.6%
Other services................................ 46.4% 79.9% 82.5% 83.0% 85.2% 78.0%
------------- ------------ ---------- ---------- -------- -----------
Total gross margin percentage............... 16.2% 16.5% 15.2% 13.6% 13.9% 14.5%
------------- ------------ ---------- ---------- -------- -----------
------------- ------------ ---------- ---------- -------- -----------
Selling, general and administrative expenses.... $ 181,320 $ 97,436 $ 182,411 $ 201,880 $ 93,134 $ 116,237
% of total revenue.............................. 16.5% 16.6% 13.2% 11.2% 10.7% 10.5%
Operating income (loss)......................... $ (3,296) $ (434) $ 28,127 $ 43,047 $ 28,113 $ 43,166
% of total revenue.............................. (0.3)% (0.1)% 2.0% 2.4% 3.2% 3.9%
</TABLE>
SIX MONTHS ENDED OCTOBER 31, 1996 AS COMPARED TO THE SIX MONTHS ENDED OCTOBER
31, 1995
PRODUCT. Revenue increased 24.9% to $953.1 million for the six months ended
October 31, 1996 from $763.1 million for the six months ended October 31, 1995
as a result of the Company's successful sales and marketing efforts and
increased sales resulting from the acquisition of the Dataflex Regions. Gross
margin increased 34.1% to $94.9 million for the six months ended October 31,
1996 from $70.8 million for the six months ended October 31, 1995. Gross margin
percentage increased to 10.0% for the six months ended October 31, 1996 from
9.3% for the six months ended October 31, 1995. The increase in gross margin
reflects the changing nature of the Company's relationships with its customers
in moving toward longer-term procurement services relationships as opposed to
periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 101.9% to $49.3 million for the
six months ended October 31, 1996 from $24.4 million for the six months ended
October 31, 1995. This increase was a result of increasing customer demand for
the Company's higher-end consulting services, as well as the Company's increased
capacity to deliver such services. The Company believes that increased customer
demand resulted from the continuing transition by the Company's customers to new
higher performance technologies and increased utilization of client/server
networks. By the end of October 1996, the Company employed approximately 1,100
system engineers as compared to approximately 600 in October 1995. Gross margin
increased 84.1% to $20.7 million for the six months ended October 31, 1996 from
$11.2 million for the six months ended October 31, 1995. Gross margin percentage
decreased to 42.0% for the six months ended October 31, 1996 from 46.0% for the
six months ended October 31, 1995. The decrease in gross
31
<PAGE>
margin percentage resulted from an increase in transitional training and
deployment costs reflecting the Company's continued commitment to hire and train
additional systems engineers to support Microsoft NT.
LIFE CYCLE SERVICES. Revenue increased 20.7% to $81.5 million for the six
months ended October 31, 1996 from $67.5 million for the six months ended
October 31, 1995. This increase reflects the increase in demand for the
Company's overall life cycle service offerings. Gross margin increased 18.4% to
$29.0 million for the six months ended October 31, 1996 from $24.5 million for
the six months ended October 31, 1995. Gross margin percentage decreased
slightly to 35.6% for the six months ended October 31, 1996 from 36.3% for the
six months ended October 31, 1995.
OTHER SERVICES. Revenue increased 9.7% to $18.9 million for the six months
ended October 31, 1996 from $17.3 million for the six months ended October 31,
1995 primarily due to the acquisition of Mentor Technologies, Ltd., and Ohio
limited partnership (the "Mentor Partnership"). Gross margin increased 0.5% to
$14.8 million for the six months ended October 31, 1996 from $14.7 million for
the six months ended October 31, 1995. Gross margin percentage decreased to
78.0% for the six months ended October 31, 1996 from 85.2% for the six months
ended October 31, 1995. The decline in gross margin percentage was primarily the
result of the higher contribution of training and education revenue to total
other services revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 24.8% to $116.2 million for the six months
ended October 31, 1996 from $93.1 million for the six months ended October 31,
1995. Selling, general and administrative expenses as a percentage of revenue
decreased to 10.5% for the six months ended October 31, 1996 from 10.7% for the
six months ended October 31, 1995.
OPERATING INCOME. Operating income increased 53.5% to $43.2 million for the
six months ended October 31, 1996 from $28.1 million for the six months ended
October 31, 1995. This increase was the result of the increases in revenue,
gross margin percentage, and a decrease in selling, general and administrative
expenses as a percentage of revenue. Operating income as a percentage of total
revenue increased to 3.9% for the six months ended October 31, 1996 from 3.2%
for the six months ended October 31, 1995.
INTEREST. Interest expense is incurred primarily on borrowings under the
Company's Financing Program Agreement with IBMCC. Interest expense decreased
39.3% to $10.9 million for the six months ended October 31, 1996 from $17.9
million for the six months ended October 31, 1995 due to lower average
borrowings and lower interest rates. The decline in borrowings was the result of
improved cash flow from increased profitability combined with the issuance of
the Preferred Securities.
TAXES. The effective tax rate for the six months ended October 31, 1996 and
October 31, 1995 of 37% was different than the U.S. statutory rate of 35% due to
state tax provisions.
DISTRIBUTIONS ON CONVERTIBLE PREFERRED SECURITIES OF TRUST, NET OF TAX. In
October, 1996, the Trust issued 4,025,000 Convertible Preferred Securities as
part of a refinancing plan directed at converting its long-term variable rate
debt to fixed rate obligations and reducing its overall interest costs.
Distributions on Preferred Securities accrue at an annual rate of 6.75% of the
liquidation value of $50 per security and are included net of the tax effect on
the associated Convertible Debentures in Distributions on Convertible Preferred
Securities of Trust in the consolidated statements of income. (See Note 3 of
Notes to Consolidated Financial Statements.)
YEAR ENDED APRIL 30, 1996 AS COMPARED TO THE YEAR ENDED APRIL 30, 1995
PRODUCT. Revenue increased 32.9% to $1.6 billion for the year ended April
30, 1996 from $1.2 billion for the year ended April 30, 1995 as a result of the
Company's successful sales and marketing efforts and strengthened market
position. Gross margin increased 30.3% to $147.9 million for the year ended
April 30,
32
<PAGE>
1996 from $113.5 million for the year ended April 30, 1995. Gross margin
percentage decreased to 9.4% for the year ended April 30, 1996 from 9.6% for the
year ended April 30, 1995 due to the Company's emphasis on larger customers
which resulted in lower gross margin percentages but higher sales volumes that
more than offset the associated increase in distribution costs.
PROFESSIONAL SERVICES (FORMERLY NETWORKING). Revenue increased 82.5% to
$58.1 million for the year ended April 30, 1996 from $31.8 million for the year
ended April 30, 1995. This increase reflects the increased customer demand for
the Company's value-added PC network service offerings. Gross margin increased
75.5% to $23.0 million for the year ended April 30, 1996 from $13.1 million for
the year ended April 30, 1995. Gross margin percentage decreased to 39.6% for
the year ended April 30, 1996 from 41.2% for the year ended April 30, 1995 due
to increased investments in systems engineers.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES). Revenue increased 5.5% to
$138.4 million for the year ended April 30, 1996 from $131.2 million for the
year ended April 30, 1995. This increase reflects the growth in support services
related to increased product sales which more than offset a decline in repair
and maintenance services attributable to improved product reliability and a
shift by vendors to extended warranty programs. Gross margin decreased 10.8% to
$49.1 million for the year ended April 30, 1996 from $55.1 million for the year
ended April 30, 1995. Gross margin percentage decreased to 35.5% for the year
ended April 30, 1996 from 42.0% for the year ended April 30, 1995, as a result
of startup costs associated with newly obtained contracts.
OTHER SERVICES. Revenue decreased 14.3% to $30.0 million for the year ended
April 30, 1996 from $35.0 million for the year ended April 30, 1995. The
decrease was the result of a negotiated reduction in the distribution fee from
Merisel FAB and reduced demand for the Company's training services. Gross margin
decreased to $24.9 million for the year ended April 30, 1996 from $28.9 million
for the year ended April 30, 1995 while the gross margin percentage remained
relatively constant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10.7% to $201.9 million for the year ended
April 30, 1996 from $182.4 million for the year ended April 30, 1995. Selling,
general and administrative expenses as a percentage of total revenue decreased
to 11.2% for the year ended April 30, 1996 from 13.2% for the year ended April
30, 1995. This decrease is due to higher volumes of product and networking
revenue that more than offset the increase in associated fixed costs as well as
cost reduction efforts to consolidate administrative functions and centralize
branches.
OPERATING INCOME. Operating income increased 53.0% to $43.0 million for the
year ended April 30, 1996 from $28.1 million for the year ended April 30, 1995.
Operating income as a percentage of total revenue increased to 2.4% for the year
ended April 30, 1996 from 2.0% for the year ended April 30, 1995 as the decrease
in selling, general and administrative expenses as a percentage of total revenue
more than offset the decrease in the total gross margin percentage.
INTEREST. Interest expense is incurred primarily on borrowings to support
the working capital requirements of the products line of business and the
Merisel FAB distribution services agreement. Interest expense increased 10.0% to
$35.8 million for the year ended April 30, 1996 from $32.6 million for the year
ended April 30, 1995 due principally to higher average borrowings during fiscal
year 1996 related to increased inventory levels and receivable balances as a
result of the significant growth in products revenue. Interest income decreased
15.8% to $5.5 million from $6.6 million as the Company was paid in full on a
significant note receivable during the first quarter of fiscal year 1996.
TAXES. The effective tax rate for the year ended April 30, 1996 of 37.0%
and 1995 of 41.0% was different than the U.S. statutory rate of 35.0% primarily
due to state tax provisions.
33
<PAGE>
FISCAL YEAR ENDED APRIL 30, 1995 AS COMPARED TO THE ANNUALIZED SEVEN MONTHS
ENDED APRIL 30, 1994
PRODUCT. Revenue increased 41.2% in 1995 from 1994, primarily because cash
generated from the sale of the Company's U.S. franchise business enabled the
Company to meet increased customer demand through improved product stocking
levels. Gross margin increased 24.3% in 1995 from 1994 while the gross margin
percentage decreased to 9.6% in 1995 from 10.9% in 1994. This decrease was the
result of the Company's emphasis on larger customers which resulted in lower
gross margin percentages but higher sales volumes that more than offset the
associated increase in distributed costs.
PROFESSIONAL SERVICES (FORMERLY NETWORKING.) Revenue increased 89.0% in
1995 from 1994 due to a significant increase in the Company's capacity to meet
increased demand for value-added networking services. This increase in capacity
was a result of the Company's investments in hiring and training systems
engineers in prior periods. Gross margin increased 132.4% in 1995 from 1994.
Gross margin percentage increased to 41.2% in 1995 from 33.5% in 1994 as a
result of the increased utilization of the Company's systems engineers.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES.) Revenue decreased 0.3% in
1995 from 1994. Gross margin decreased 2.7% in 1995 from 1994. Gross margin
percentage decreased to 42.0% in 1995 from 43.0% in 1994, as a result of annual
wage rate increases which were not offset by increased revenue.
OTHER SERVICES. Revenue increased 118.7% in 1995 from 1994. This increase
is primarily attributable to the fees derived from the Merisel FAB distribution
services agreement, which began in February 1994. Gross margin increased 126.0%
in 1995 from 1994. Gross margin percentage increased to 82.5% in 1995 from 79.9%
in 1994 resulting from an increase in revenue without a commensurate increase in
cost of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9.2% in 1995 from 1994. Selling, general and
administrative expenses as a percentage of total revenue decreased to 13.2% in
1995 from 16.6% in 1994, due to the cost reduction efforts to consolidate sales
administration activities and to the effect of higher volumes of product and
networking that more than offset the increase in associated fixed costs.
OPERATING INCOME (LOSS). Operating income increased to $28.1 million in
1995 from an operating loss in 1994 as the decline in selling, general and
administrative expenses as a percentage of total revenue and the increase in
networking gross margin percentage more than offset the decline in the products
gross margin percentage.
INTEREST. Interest expense increased 48.5% in 1995 from 1994 due
principally to higher borrowings related to increased inventory levels and
receivable balances as a result of the significant growth in products revenue,
combined with increases in the prime rate throughout calendar 1994. Interest
income during 1994 consisted primarily of earnings on a long-term note
receivable. Interest income during 1995 consisted primarily of early pay
discounts.
TAXES. The effective tax rate for 1995 of 41.0% and 1994 of 40.0% was
different than the U.S. statutory rate of 35.0% primarily due to the state tax
provision and benefit, respectively.
ANNUALIZED SEVEN MONTHS ENDED APRIL 30, 1994 AS COMPARED TO THE FISCAL YEAR
ENDED SEPTEMBER 30, 1993
PRODUCT. Revenue decreased 10.1% in 1994 from 1993 primarily due to
limitations on product stocking levels resulting from working capital
constraints. Gross margin decreased 17.5% in 1994 from 1993. Gross margin
percentage also decreased to 10.9% in 1994 from 11.8% in 1993.
PROFESSIONAL SERVICES (FORMERLY NETWORKING.) Revenue increased 7.7% in 1994
from 1993 due to the increased demand for the Company's high-end, value-added
networking services. Gross margin decreased 25.0% in 1994 from 1993. Gross
margin percentage declined to 33.5% in 1994 from 48.1% in 1993 as a
34
<PAGE>
result of costs associated with hiring and training new systems engineers in
anticipation of the future growth in networking revenue.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES.) Revenue decreased 8.3% in
1994 from 1993 due to the elimination by the Company of several large contracts.
Gross margin decreased 1.3% in 1994 from 1993. Gross margin percentage increased
to 43.0% in 1994 from 39.9% in 1993, due to higher utilization of field
engineers.
OTHER SERVICES. Revenue increased 193.7% in 1994 from 1993 due to the
inclusion of fees derived from the Merisel FAB distribution services agreement.
Gross margin significantly increased in 1994 from 1993. Gross margin percentage
increased to 79.9% in 1994 from 46.4% in 1993 due to the implementation of the
Merisel FAB distribution services agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 7.9% in 1994 from 1993. Selling, general and
administrative expenses as a percentage of total revenue increased slightly to
16.6% in 1994 from 16.5% in 1993.
OPERATING LOSS. The operating loss was significantly reduced in 1994 from
1993 as the increase in other services gross margin percentage due to the new
Merisel FAB agreement more than offset the decrease in products and networking
gross margin.
INTEREST. Interest expense decreased 4.9% in 1994 from 1993. Interest
income during 1994 and 1993 consisted primarily of earnings on a long-term note
receivable.
TAXES. The effective income tax rate for the seven months ended April 30,
1994 of 40.0% was different than the U.S. statutory rate of 35.0% due primarily
to the state tax provision. The effective tax rate for 1993 of 26.4% was lower
than the U.S. statutory rate of 34.0% primarily due to unbenefitted current year
losses partially offset by state tax benefits.
35
<PAGE>
QUARTERLY OPERATING RESULTS
The following table sets forth the unaudited operating results for each of
the four quarters in fiscal 1995 and fiscal 1996 and for the first two quarters
of fiscal 1997. In the opinion of management, this information has been prepared
on the same basis as the audited consolidated financial statements and includes
all necessary adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary to present fairly such information. The table
should be read in conjunction with the audited consolidated financial statements
of the Company and notes thereto incorporated by reference in this Prospectus.
The Company's quarterly results have in the past been subject to fluctuations
and, as a result, the operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1994 1994 1995 1995 1995
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Product............................... $251,618 $289,819 $303,171 $342,784 $374,083
Services:
Professional services............... 6,247 7,552 8,508 9,535 10,855
Life cycle services................. 32,562 32,361 32,587 33,684 33,484
Other services...................... 9,382 8,822 8,587 8,173 8,747
-------- -------- -------- --------- --------
Total revenue..................... 299,809 338,554 352,853 394,176 427,169
-------- -------- -------- --------- --------
COST OF GOODS SOLD:
Product............................... 226,040 262,745 275,011 310,083 339,883
Services:
Professional services............... 3,604 4,018 5,124 5,985 5,956
Life cycle services................. 18,754 18,933 18,425 20,029 21,061
Other services...................... 1,625 1,592 1,549 1,337 1,374
-------- -------- -------- --------- --------
Total cost of goods sold.......... 250,023 287,288 300,109 337,434 368,274
-------- -------- -------- --------- --------
Gross margin............................ 49,786 51,266 52,744 56,742 58,895
Selling, general and administrative
expenses(1)......................... 44,189 44,778 45,610 47,834 46,362
-------- -------- -------- --------- --------
Operating income (loss)................. 5,597 6,488 7,134 8,908 12,533
Interest expense, net................. (5,568) (6,006) (7,006) (7,398) (7,273)
-------- -------- -------- --------- --------
Income (loss) before income taxes and
distributions on convertible preferred
securities of trust................... 29 482 128 1,510 5,260
Income tax benefit (provision)........ (12) (197) (52) (620) (1,946)
Distributions on convertible preferred
securities of trust, net of tax....... -- -- -- -- --
Gain on disposal of discontinued
businesses.......................... -- -- -- -- --
-------- -------- -------- --------- --------
NET INCOME (LOSS)....................... $ 17 $ 285 $ 76 $ 890 $ 3,314
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
Earnings (loss) per share:(2)
Continuing operations................. $ -- $ 0.01 $ -- $ 0.03 $ 0.10
Discontinued operations -- -- -- -- --
-------- -------- -------- --------- --------
TOTAL EARNINGS (LOSS) PER SHARE......... -- $ 0.01 -- $ 0.03 $ 0.10
-------- -------- -------- --------- --------
-------- -------- -------- --------- --------
<CAPTION>
OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1995 1996 1996 1996 1996
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUE:
Product............................... $389,030 $391,130 $424,055 $490,065 $463,057
Services:
Professional services............... 13,561 16,514 17,197 21,698 27,600
Life cycle services................. 34,031 34,758 36,145 38,939 42,532
Other services...................... 8,506 4,460 8,257 8,388 10,544
-------- -------- --------- -------- --------
Total revenue..................... 445,128 446,862 485,654 559,090 543,733
-------- -------- --------- -------- --------
COST OF GOODS SOLD:
Product............................... 352,433 354,876 383,212 441,593 416,616
Services:
Professional services............... 7,223 10,161 11,774 13,281 15,327
Life cycle services................. 21,940 21,683 24,603 24,454 27,984
Other services...................... 1,180 1,252 1,275 1,640 2,525
-------- -------- --------- -------- --------
Total cost of goods sold.......... 382,776 387,972 420,864 480,968 462,452
-------- -------- --------- -------- --------
Gross margin............................ 62,352 58,890 64,790 78,122 81,281
Selling, general and administrative
expenses(1)......................... 46,772 76,891 31,855 56,896 59,340
-------- -------- --------- -------- --------
Operating income (loss)................. 15,580 (18,001) 32,935 21,226 21,941
Interest expense, net................. (7,721) (8,557) (6,714) (5,729) (3,359)
-------- -------- --------- -------- --------
Income (loss) before income taxes and
distributions on convertible preferred
securities of trust................... 7,859 (26,558) 26,221 15,497 18,582
Income tax benefit (provision)........ (2,908) 9,827 (9,700) (5,734) (6,875)
Distributions on convertible preferred
securities of trust, net of tax....... -- -- -- -- (629)
Gain on disposal of discontinued
businesses.......................... -- 9,194 -- -- --
-------- -------- --------- -------- --------
NET INCOME (LOSS)....................... $ 4,951 $ (7,537) $ 16,519 $ 9,763 $ 11,078
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
Earnings (loss) per share:(2)
Continuing operations................. $ 0.15 $ (0.53) $ 0.44 $ 0.23 $ 0.26
Discontinued operations -- 0.29 -- -- --
-------- -------- --------- -------- --------
TOTAL EARNINGS (LOSS) PER SHARE......... $ 0.15 $ (0.24) $ 0.44 $ 0.23 $ 0.26
-------- -------- --------- -------- --------
-------- -------- --------- -------- --------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1994 1994 1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product..................... 83.9% 85.6% 85.9% 87.0% 87.6% 87.4% 87.5% 87.3%
Services:
Professional services..... 2.1% 2.2% 2.4% 2.4% 2.5% 3.0% 3.7% 3.5%
Life cycle services....... 10.9% 9.6% 9.2% 8.5% 7.8% 7.6% 7.8% 7.4%
Other services............ 3.1% 2.6% 2.4% 2.1% 2.0% 1.9% 1.0% 1.7%
--------- --------- --------- --------- --------- --------- --------- ---------
Total revenue........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
COST OF GOODS SOLD:
Product..................... 75.4% 77.6% 77.9% 78.7% 79.6% 79.2% 79.4% 78.9%
Services:
Professional services..... 1.2% 1.2% 1.5% 1.5% 1.4% 1.6% 2.3% 2.4%
Life cycle services....... 6.3% 5.6% 5.2% 5.1% 4.9% 4.9% 4.9% 5.1%
Other services............ 0.5% 0.5% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3%
--------- --------- --------- --------- --------- --------- --------- ---------
Total cost of goods
sold.................. 83.4% 84.9% 85.1% 85.6% 86.2% 86.0% 86.8% 86.7%
--------- --------- --------- --------- --------- --------- --------- ---------
Gross margin.................. 16.6% 15.1% 14.9% 14.4% 13.8% 14.0% 13.2% 13.3%
Selling, general, and
administrative expenses... 14.7% 13.2% 12.9% 12.1% 10.9% 10.5% 17.2% 6.6%
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)....... 1.9% 1.9% 2.0% 2.3% 2.9% 3.5% (4.0)% 6.8%
Interest expense, net....... (1.9)% (1.8)% (2.0)% (1.9)% (1.7)% (1.7)% (1.9)% (1.4)%
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income
taxes and distributions on
convertible preferred
securities of trust......... 0.0% 0.1% 0.0% 0.4% 1.2% 1.8% (5.9)% 5.4%
--------- --------- --------- --------- --------- --------- --------- ---------
Income tax benefit
(provision)............... (0.0)% (0.1)% (0.0)% (0.2)% (0.5)% (0.7)% 2.2% (2.0)%
Distributions on convertible
preferred securities of
trust, net of tax......... -- -- -- -- -- -- -- --
Gain on disposal of
discontinued businesses... -- % -- % -- % -- % -- % -- % 2.1% -- %
--------- --------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS)............. 0.0% 0.1% 0.0% 0.2% 0.8% 1.1% (1.7)% 3.4%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
JULY 31, OCT. 31,
1996 1996
--------- ---------
<S> <C> <C>
Revenue:
Product..................... 87.7% 85.2%
Services:
Professional services..... 3.9% 5.1%
Life cycle services....... 7.0% 7.8%
Other services............ 1.5% 1.9%
--------- ---------
Total revenue........... 100.0% 100.0%
COST OF GOODS SOLD:
Product..................... 79.0% 76.7%
Services:
Professional services..... 2.4% 2.8%
Life cycle services....... 4.4% 5.1%
Other services............ 0.3% 0.5%
--------- ---------
Total cost of goods
sold.................. 86.0% 85.1%
--------- ---------
Gross margin.................. 14.0% 14.9%
Selling, general, and
administrative expenses... 10.2% 10.9%
--------- ---------
Operating income (loss)....... 3.8% 4.0%
Interest expense, net....... (1.0)% (0.6)%
--------- ---------
Income (loss) before income
taxes and distributions on
convertible preferred
securities of trust......... 2.8% 3.4%
--------- ---------
Income tax benefit
(provision)............... (1.0)% (1.3)%
Distributions on convertible
preferred securities of
trust, net of tax......... -- (0.1)%
Gain on disposal of
discontinued businesses... -- % -- %
--------- ---------
NET INCOME (LOSS)............. 1.7% 2.0%
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) During the third quarter of fiscal year 1996, the Company recorded a $31.1
million provision against its extended credit due from Merisel FAB. In the
fourth quarter of fiscal year 1996, the Company reversed $15.6 million of
this provision.
(2) Earnings per share give effect to the conversion of all outstanding shares
of Preferred Stock and Class B Common Stock into Company Common Stock and
the exchange of all outstanding warrants for shares of Company Common Stock
in connection with the Company's IPO as if the conversion had occurred at
the later of the beginning of fiscal year 1995 or the issuance date.
Earnings per share are calculated based upon the weighted average number of
shares of Company Common Stock and dilutive Company Common Stock equivalents
outstanding in each quarter. Consequently, the sum of the quarterly earnings
per share does not necessarily equal the year-to-date earnings per share.
The Company's quarterly revenues and operating results have varied
significantly in the past and will likely continue to do so in the future.
Quarterly 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 timing of major service projects, inventory adjustments,
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 and interest rates.
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. Future limitations of credit
37
<PAGE>
by vendors could materially adversely affect the Company. In addition, the
general availability of certain products, particularly state of the art
computing and data communications products, is occasionally restricted. While
the Company has not experienced significant product supply shortages, other than
due to credit restrictions as described above, any such product supply shortages
in the future could have a material adverse effect on the Company. Because
revenues are recognized upon the shipment of products to the customer, revenues
from product sales in any quarter are substantially dependent on orders shipped
in any given quarter. The Company is increasing its fixed operating expenses,
including a significant increase relating to additional personnel, based on
anticipated revenue growth in its professional services and life cycle services.
The Company may be unable to adjust spending sufficiently in a timely manner to
compensate for any unexpected revenue shortfall, which could adversely affect
operating results. Accordingly, the Company believes that 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
indicative of results to be expected for a full fiscal year. It is possible that
in certain future quarters, the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of Common Stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has utilized its line of credit with IBMCC and its operating
profits as well as cash proceeds from the issuance of Company Common Stock and
the sale of its franchise business to fund its significant revenue growth and
working capital requirements, to make payments on its long-term debt and to
purchase capital equipment.
The Company currently has a $275 million line of credit under the Financing
Program Agreement with IBMCC. At October 31, 1996, the Company had $245.7
million outstanding under this facility (at which time, the facility provided
$300 million in available credit) of which $130.1 million is included in
accounts payable and $115.6 million is classified as short-term borrowings.
Borrowings under the line of credit are subject to certain borrowing base
limitations and are secured by portions of the Company's inventory, accounts
receivable and certain other assets. The line of credit currently has a term
expiring October 31, 1997 and is renewable thereafter for successive six-month
periods. IBMCC may terminate the line of credit at any time upon 90 days' notice
to the Company. In the event of such termination, the outstanding borrowings
under the Financing Program Agreement mature at the end of the term of the line
of credit. As of October 31, 1996 amounts borrowed under the line of credit bear
interest at prime minus 0.50%.
As a result of improved profitability and decreases in accounts receivable,
partially offset by increases in inventory levels and decreases in accounts
payable, the Company's operating activities provided cash of $15.4 million for
the six months ended October 31, 1996. The decrease in receivables is primarily
the result of payments received on the Company's accounts receivable from
Merisel FAB. The decrease in accounts payable is a result of significant early
pay vendor discounts taken in October 1996.
During the six months ended October 31, 1996, the Company used cash of $35.6
million (net of cash acquired) to purchase the Dataflex Regions and $173.6
million to repay amounts borrowed under its Financing Program Agreement with
IBMCC. During this period, the Company also used cash of $7.2 million for
capital expenditures and plans to make additional significant investments in its
automated systems and its capital equipment throughout the remainder of fiscal
year 1997.
In January 1994, the Company sold certain assets and liabilities of its U.S.
franchise business to Merisel FAB for $80.2 million in cash plus additional
contingent consideration. In February 1996, the Company received an additional
$14.6 million from the sale in settlement of the contingent consideration.
Pursuant to its distribution and services agreement, the Company continues to
supply product to Merisel FAB for which it earns a monthly distribution fee.
Approximately 40% of the Company's inventory shipments by dollar volume are made
to fulfill the Company's obligations under the distribution services
38
<PAGE>
agreement. Pursuant to such agreement, Merisel FAB is obligated to pay the
Company for its daily purchases within two business days.
In March 1996, the Company completed its IPO selling 9,215,770 shares of
Company Common Stock and raising $83.4 million after selling expenses and
underwriting discounts and commissions. The Company used the proceeds of the
offering primarily to repay amounts borrowed under the line of credit with
IBMCC.
Effective May 24, 1996, the Company acquired substantially all of the assets
and liabilities previously associated with the business operations of Dataflex
Corporation known as the Dataflex Western and Southwest Regions. The Company
paid $37.0 million against an estimated purchase price of $42.0 million. The
purchase price is subject to certain post-closing adjustments. In addition, the
Company has recently consummated certain other acquisitions. See "Recent
Developments." Management of the Company intends to actively pursue the
acquisition of other companies that sell products and services that either
complement or are expected to expand its existing business. One or more of such
acquisitions could require a substantial cash investment by the Company. See
"Risk Factors--Acquisitions."
On October 2, 1996, the Company consummated the Original Offering, resulting
in the sale of 3,500,000 shares of the Preferred Securities to the Initial
Purchasers. In connection with this transaction, the Company and the Trust
granted the Initial Purchasers a 30-day option to purchase up to 525,000
additional Preferred Securities (the "Over-Allotment Option") on the same terms
and conditions as the Original Offering, solely to cover over-allotments, if
any. The Initial Purchasers exercised the Over-Allotment Option in its entirety
on October 28, 1996. The aggregate net proceeds to the Company from the Original
Offering and the Over-Allotment Offering totaled $194.5 million after selling
expenses, discounts and commissions. The Company used all of the proceeds to
reduce its outstanding indebtedness to IBMCC.
Effective December 20, 1996, the Company consummated a revolving funding
trade receivables securitization facility (the "Securitization Facility") which
provides the Company with up to $175 million in available credit. See "Recent
Developments." Immediately after establishing the Securitization Facility, the
Company obtained $130.5 million in proceeds therefrom of which $105.5 million
was used to repay a portion of the IBMCC indebtedness. The remaining
availability under the Securitization Facility is intended to be used for
general corporate purposes and for potential future acquisitions of, or
investments in, one or more businesses by the Company.
The Company believes that cash generated from operations and the
Securitization Facility, together with its existing credit facilities, will be
sufficient to meet its cash requirements through at least the end of fiscal
1998.
39
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS." SEE "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995."
The Company is a leading provider of services and products designed to build
and manage PC network infrastructures primarily for Fortune 1000 companies and
other large enterprises. The Company provides customized, integrated solutions
for its customers' distributed computing networks by combining a comprehensive
offering of value-added services with its expertise in sourcing and distributing
PCs, network products, computer peripherals and software from a variety of
vendors. These integrated solutions are designed to support the customer's
client/server environments throughout its life cycle. The Company refers to
these solutions as "Life Cycle Management." Life Cycle Management integrates the
offerings of design and consulting, acquisition and deployment, operation and
support, and enhancement and migration.
The Company believes that its customers require increasingly sophisticated
PC network systems and support infrastructures. The Company seeks to satisfy
these requirements while seeking to minimize its customers' internal staff
requirements and systems development risk. The Company enhances the delivery of
its services and products with automated systems, such as the Vanstar Navigator,
and process methodologies, such as Horizon, to analyze, design and manage its
customers' PC network infrastructures better. The Company's goal is to reduce
the labor component of the management of the life cycle of the PCs and related
network systems and thereby increase efficiency, reduce costs and make systems
more reliable and easier to use for every customer.
INDUSTRY
Large organizations are becoming increasingly dependent on information
technology to compete effectively in today's global markets. Organizations are
re-engineering their businesses and are using microcomputer-based network
technology to enhance productivity. Distributed network solutions provide
dramatic computing performance relative to their price. PC networks increase
speed and flexibility and provide improved functionality to end users. Achieving
the optimal automation solution, however, is challenged by the complexity of the
distributed network environment and the lack of trained resources to design,
deploy and support networks.
The decision-making process that organizations face when planning, selecting
and implementing information technology solutions is growing more complex.
Organizations must select from numerous product options with shortening life
cycles. Networks are typically comprised of PCs, peripherals, communications
devices and software. Large enterprises must continually integrate the diverse
PC environments that have been developed internally. Enterprises must design new
networks, and upgrade and migrate to new systems. Although PC networks enhance
business productivity, they typically present complex management problems and
increased administrative costs. According to The Gartner Group, a leading
information technology research firm, the total cost of ownership of a PC over
five years may be as much as five times the initial capital expense. In
addition, the shortage of qualified information technology personnel limits many
organizations' ability to capitalize on the latest technologies. These
organizations find it increasingly difficult and costly to maintain the internal
infrastructure needed to support their networks. Since many businesses do not
consider the internal management of their technology infrastructure to be a core
business activity, companies increasingly seek to outsource the management and
support of their PC network infrastructure.
The Company believes that no other company in the marketplace today offers
customers a sufficient range of integrated PC network solutions. Many service
providers, including systems integrators, consulting firms and those emerging
from the traditional mainframe environment, offer limited services, lack the
40
<PAGE>
capacity to support large widespread enterprises, or focus primarily on
non-infrastructure services. Value-added resellers typically have a regional
focus or do not offer a broad line of products and services. They often are too
small to service the complex network requirements of the large multi-site
customer.
The Company believes that the key criteria which businesses consider when
evaluating PC network integration service providers include the provider's
ability: (i) to deliver one integrated solution spanning the PC network's life
cycle; (ii) to supply multi-vendor network products customized to specific
end-user demands; and (iii) to provide services on a national and international
basis.
THE VANSTAR SOLUTION
The Company's product and service offerings span the life cycle of the PC
network infrastructure. The Company provides customized, integrated solutions
for the network infrastructure needs of its customers by combining a
comprehensive offering of value-added services with its expertise in sourcing
and distributing products from a variety of vendors. The Company believes that a
single source solution enables customers to use fewer vendors, and provides
tighter integration, lower costs, fewer errors, and greater management control.
The Company has built substantial resource depth in all service areas and offers
its integrated services on a nationwide basis.
The Company believes that its customers are demanding increasingly
sophisticated PC network systems and support infrastructures. The Company seeks
to satisfy these requirements while minimizing its customers' internal staff
requirements and systems development risk. The Company enhances the delivery of
its services and products with automated systems that utilize open architecture
and are expandable. The Company believes that significant efficiency can be
gained by capturing data at the point of origin and controlling that data
throughout the life cycle. The Company also uses automation to give its
customers greater control over order management and provision of services. The
Company's automated systems permit direct links between the customer and the
Company, which the Company believes results in more efficient and faster
delivery of products and services at a lower overall cost. For example, the
Vanstar Navigator provides an easy-to-use customer interface for self-service
order management. The Vanstar Navigator connects to the Vanstar Cockpit, which
provides the Company's customer service representatives with real-time product
availability, pricing and customer-specific account information. Another example
is the Company's NOVA system, a service delivery system developed by the Company
for the management of many of the Company's services: systems engineering, help
desk, dispatch, repair, installation, moves/adds/changes and asset management.
NOVA is designed to reduce costs, to improve billing procedures to capture
additional revenue, and to improve resource utilization in delivering the
Company's support services. The Company expects to fully implement NOVA during
the third and fourth quarters of fiscal 1997. The Company believes that its
automated systems significantly enhance its ability to satisfy its customers'
needs.
STRATEGY
The Company's objective is to continue to be a leading provider of a
complete range of PC network infrastructure products and services to large
businesses throughout the world. The Company now offers a full array of services
including design and consulting, acquisition and deployment, operation and
support, and enhancement and migration. To achieve its objective, the Company
believes it must:
LEVERAGE ITS BROAD CUSTOMER BASE
The Company has approximately 300 current customers who purchased products
and services totaling at least $1 million during fiscal year 1996. Preserving
and enhancing its relationship with these customers is the Company's first
priority. In support of this effort, the Company recently brought its Starbase
Account Management system on-line. Starbase is an extensive database of customer
information that can be
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integrated with external data to pinpoint opportunities for application of the
Company's Life Cycle Management program.
DEVELOP AND ENHANCE VALUE-ADDED SERVICES
The Company believes that opportunities exist to increase its operating
margins by increasing the range of value-added services that it currently offers
its customers. The market for outsourced PC network services is expected to grow
at a compound annual rate of approximately 14%. These services are typically
sold at higher margins than more traditional services, such as product
procurement or repair and maintenance. The Company has developed expertise and
solutions in a number of value-added market segments, and will continue to
develop new services using its Horizon development methodology. The Company also
works with its suppliers, many of which provide leading technologies, to develop
new services. For example, the Company provides services to integrate Microsoft
Windows NT and Microsoft BackOffice into the Company's customers' environments.
The Company believes its relationship with Microsoft enhances its knowledge base
and expertise. The Company continually evaluates and pursues opportunities to
acquire technology and other resources that will enhance and extend the reach of
its value-added service offerings. The Company believes numerous opportunities
will exist in the future to acquire service providers who complement its
existing network services business.
EXPAND ITS WORLDWIDE SERVICE CAPABILITIES
The Company believes that in addition to being in all major United States
markets, it must also expand its global offerings. To expand its global
presence, the Company is implementing a program that overlays the Company's
systems and processes onto the service delivery and product distribution
capabilities of Groupe Bull, a European-based global computer and computer
services company, and Ingram Micro, an international computer products
distributor. This integrated program will provide to the Company's U.S.-based
multinational customers a common management interface covering the Company
performed services in the United States or services from the Company or its
alliance partners in other countries.
MAINTAIN A FOCUSED ACQUISITION STRATEGY
In order to maintain its position as a leading provider of PC network
infrastructure solutions to large businesses, the Company believes that
expansion through acquisitions, as well as internal growth, will be necessary.
Accordingly, the Company has consummated and expects to continue to pursue the
acquisition of companies that sell products and services that either complement
or expand its existing business. See "Risk Factors--Acquisitions" and "Recent
Developments."
PRODUCTS AND SERVICES
The Company combines a full suite of products and services to deliver
custom, integrated solutions for the PC network infrastructure requirements of
its customers. The Company combines value-added services with its expertise in
sourcing and distributing products from a variety of vendors to provide network
integration solutions. These integrated Life Cycle Management solutions are
designed to support the PC network infrastructure throughout its life cycle.
Life Cycle Management integrates the offering of design and consulting,
acquisition and deployment, operation and support, and enhancement and
migration. 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 quality service and to
attaining customer satisfaction. Through planning and management, the Company
seeks to optimize solutions at any point in the PC network life cycle.
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DESIGN AND CONSULTING SERVICES
The Company offers network design and consulting services that address the
PC network life cycle. For network design, the Company uses a five-step
methodology to assist customers in selecting, designing, planning and executing
a network project: discovery, current state definition, requirements definition,
solution design, and implementation planning. The Company employs national
consulting teams, such as its Enterprise Communications Consulting Group, which
provide expertise in cabling systems design, hubbing architecture,
bridging/routing/switching systems, wide area transport and network management.
Other teams have expertise in process-mapping and re-engineering for outsourcing
PC life cycle management, asset management and disaster recovery planning.
ACQUISITION AND DEPLOYMENT SERVICES
The Company's network deployment services include product procurement,
configuration, distribution, installation, cabling and connectivity.
The Company sources PCs, servers, network products, computer peripherals and
software to equip the network environment. The Company provides products from
over 1,000 vendors, including Compaq Computer Corporation, International
Business Machines Corporation ("IBM"), Hewlett-Packard Company, Apple Computer,
Inc., Sun Microsystems, Inc., Microsoft Corporation, Novell, Inc., Lotus
Development, Cisco Systems, 3Com Corporation and Bay Networks, Inc. The Company
is authorized to sell a wide variety of network products, including servers,
desktop and mobile systems, bridges, routers, hubs and concentrators, operating
systems, applications, groupware and electronic mail products. The Company
provides a single point of contact for customers to place and track all product
orders. 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.
The Company has centralized its configuration and distribution facilities in
two highly-automated distribution centers located in Indianapolis, Indiana and
Livermore, California. The distribution facilities handle product receiving,
warehousing, central configuration, testing, order handling and shipping. The
Company ensures timely and reliable network equipment integration by providing
and coordinating a number of deployment services such as set-up, installation,
cabling, server connection and testing.
OPERATION AND SUPPORT SERVICES
The Company offers a variety of network operation and support services,
including moves, adds and changes, repair and maintenance, help desk and network
monitoring and asset management. With the acquisition of CDS, the Company has
expanded its offering of outsourcing services to clients.
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, 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 in the United States within 100 miles of any of
the Company's approximately 100 service locations.
The Company offers help desk support through its Field Sales and Service
Operations Center located in Roswell, Georgia. Help desk support is available
for all major software applications and operating systems, including network
software. Help desk support can also troubleshoot problems for all major
hardware products. Customers access the help desk via a toll-free number.
Support is available up to 24 hours per day, 7 days per week. The Company's help
desk support group utilizes a call management
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system to track customer calls, to provide help desk with professionals on-line
access to support standards, and to maintain a technical support database. The
Company's help desk offerings can be delivered either from its Service
Operations Center or from an on-site facility established at a customer's
location. The Company also provides remote LAN monitoring and administration
services.
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.
ENHANCEMENT AND MIGRATION SERVICES
The Company offers enhancement and migration services to optimize the use of
information technology by its customers and reduce the cost and disruption of
changing technology platforms. The Company's tools and methods can migrate the
customer to new hardware and software platforms. These comprehensive tool kits
detail the full life cycle processes and procedures for planning and
implementing a migration project. Two of the Company's programs help customers
migrate to Windows 95 and Windows NT.
EDUCATION SERVICES
The Company's training and education services include a nationwide offering
of instructor-led and computer-based, self-paced training ("CBT") at both the
introductory and more advanced levels, and covering operating systems,
networking, electronic mail and personal productivity software. Through mobile
classrooms and a combination of CBT training with phone-based instructor
support, the Company can optimize delivery of education. The Company is a
Microsoft Authorized Technical Education Center, providing training for
Microsoft Windows 95, Windows NT, and BackOffice. Effective September 4, 1996,
the Company consummated the acquisition of the Mentor Partnership. Management of
the Company anticipates that this acquisition will strengthen the Company's
ability to offer training and education services in Ohio and throughout the
upper midwestern United States.
AUTOMATED SYSTEMS, PROCESS METHODOLOGIES AND TECHNICAL PERSONNEL
The Company enhances its service delivery with customized automated systems
which utilize open architecture and enable the Company's customers to change the
processes they use to manage their PC network support infrastructures, thereby
reducing cost and managing complexity. The Company believes efficiency can be
gained by capturing data at its point of origin and managing that data
throughout the life cycle. The Company believes that full life cycle automation
increases efficiency and reduces touch costs. Process methodologies allow the
Company to analyze, design and manage the PC network environment better. In
addition to the Company's systems and methodologies, the Company believes that
expert technical and consulting personnel are fundamental to its ability to
deliver complete network life cycle solutions.
AUTOMATED SYSTEMS
The Company has invested significant resources to automate its internal
service delivery systems and developing electronic links between the Company's
systems and its customers' systems. The Company believes that these systems
reduce costs, enhance service quality and improve reporting. The automated
systems include the Vanstar Navigator, Cockpit, DCMS, FLEX and Tracker, and
NOVA. The Company uses electronic links, including Electronic Data Interchange,
to connect to customers' systems.
THE VANSTAR NAVIGATOR. The Vanstar Navigator is an order management system
designed to give customers access to information about products available from
the Company. The Vanstar Navigator can
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be installed on either a single PC or in a multi-user environment at the
customer's site. The Vanstar Navigator 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 the Vanstar Navigator, customers can place and track
orders themselves.
COCKPIT. The Company'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. The Company's Distribution Center Management System
("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. The Company's Tracker system tracks each package from the warehouse to
the customer site. The Company's distribution centers are colocated with Federal
Express depots. The Company's systems are integrated with Federal Express'
systems, providing complete point-to-point delivery and tracking.
NOVA. The Company has developed NOVA, a service delivery system for the
management of its systems engineering, help desk, dispatch, repair,
installation, moves/add/changes and asset management service offerings. The
Company expects to fully implement NOVA during the third and fourth quarters of
fiscal 1997. NOVA's resource allocation system is designed to insure that the
appropriate technical personnel are available to respond to customer service
calls. Service calls placed by customers are received through the Company's
First Touch program. NOVA automatically determines which field engineer is
available and sends all relevant customer information to the field engineer
through a field computing device via radio. 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. The Company believes that NOVA will result in
increased customer network uptime, more accurate matching of parts and field
service engineer skills to service needs, more accurate and comprehensive
information management, and lower costs.
ELECTRONIC LINKS. In order to create a cooperative service environment, the
Company uses electronic links to connect its systems to its customers' systems
through Electronic Data Interchange, the Internet or through private Wide Area
Networks.
PROCESS METHODOLOGIES
The Company believes that the complex and sometimes unpredictable technical
environment and the customization required by customers contribute to the
variability of service delivery requirements. To manage this complexity, the
Company uses several methods for capturing, codifying and disseminating
organizational knowledge to individuals in the field. Using Horizon, its
professional service development process, the Company has developed a series of
tool kits to provide standards and solutions for common network problems plus
tools for solving unique problems. Lotus Notes is the primary vehicle used by
the Company for electronic delivery of systematized procedures and processes.
The Company also employs flexible process-mapping, just-in-time training and
knowledge-based management techniques.
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TECHNICAL PERSONNEL
The Company employs over 3,500 technical professionals in the United States.
The Company expanded its systems engineering force from approximately 200 in
March 1994 to approximately 1,200 in November 1996. The technical personnel are
both client dedicated and centrally dispatched, and provide service either on 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. 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. In May 1995, the Company entered into an
agreement with Microsoft Corporation pursuant to which the Company hired a
substantial number of systems engineers to support Microsoft's BackOffice and
Windows NT networking products.
CUSTOMERS
The Company's broad customer base of primarily Fortune 1000 companies and
other large enterprises includes, among others, the following, all of which
purchased products and services in excess of $1.0 million during the fiscal year
ended April 30, 1996 from the Company:
<TABLE>
<CAPTION>
CUSTOMER NAME INDUSTRY
- ---------------------------------------------------------------- ------------------------------
<S> <C>
Aluminum Company of America Manufacturing
American Greetings Corporation Manufacturing
Autodesk Inc. Software
BellSouth Corporation Telecommunications
Charles Schwab and Company Inc. Financial Services
Cigna Corporation Insurance
Duke Power Company Utility
Federal Express Corporation Transportation
Florida Power & Light Company Utility
Ford Motor Company Manufacturing
Hoechst Celanese Corporation Chemicals
Hoffmann-La Roche Inc. Pharmaceuticals
Integrated Systems Solutions Corporation Computer Services
International Business Machines Corporation Computers
International Paper Company Forest Products
Lehman Brothers Inc. Financial Services
Liberty Mutual Insurance Group Insurance
Lotus Development Corporation Software
MCI Communications Corporation Telecommunications
Microsoft Corporation Software
Mobil Oil Corporation Oil/Gas
Motorola Inc. High Technology
Owens-Corning Fiberglass Corporation Manufacturing
Phoenix Newspapers Inc. Publishing
Praxair Inc. Manufacturing
Sedgwick James Inc. Insurance
Signet Banking Corp. Financial Services
Sony Music Entertainment Inc. Entertainment
State of New Jersey State Government
Sybase Inc. Software
The Equitable Companies Inc. Insurance
United Technologies Corporation Aerospace and Manufacturing
UNUM Corporation Insurance
</TABLE>
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During the fiscal years ended April 30, 1995 and 1996 and during the fiscal
quarter ended October 31, 1996, Microsoft Corporation accounted for 10.8%, 12.0%
and 12.6% of the Company's total revenues, respectively.
MARKETING AND SALES
The Company markets its PC network Life Cycle Management services by
targeting executives of large enterprises who have information technology
decision-making authority. As of November 30, 1996, the Company's domestic sales
network consisted of over 800 field sales and service representatives. The
Company's direct sales force is comprised of account managers and technical
sales personnel. The Company's account manager 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, the Company 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 the Company to operate a virtual
office environment while sharing information across multiple departments.
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
personal computer services marketplace. These include Digital Equipment
Corporation Multi-Vendor Services, Electronic Data Systems Corporation,
Hewlett-Packard Company Multi-Vendor Services and Integrated Systems Solution
Corporation. Other competitors include VARs, systems integrators and third-party
service companies, such as AmeriData Technologies, Inc., CompuCom Systems, Inc.,
DecisionOne, Entex Information Services, InaCom Corp., MicroAge, Inc. and TSS.
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 or to devote greater resources to the development, promotion and
sales of their services than the Company.
LEGAL PROCEEDINGS
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.
EMPLOYEES
As of November 30, 1996, the Company had approximately 5,100 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.
PROPERTIES
The Company leases approximately 134,475 square feet of office space for its
headquarters in Pleasanton, California, under a lease expiring in January 1998.
The Company has signed an agreement to extend the lease for 89,000 of the
134,475 square feet until 2006. In June 1996, the Company sold its approximately
180,000 square foot distribution center in Indianapolis, Indiana. Following the
sale of the facility, the Company leased back the premises through April 1997
for use during the construction of a
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new, approximately 400,000 square foot build-to-specification distribution
center in Indianapolis, Indiana with occupancy targeted for May 1997. The lease
on the new facility will expire in April 2007. In June 1996, the Company reduced
the amount of space leased in its additional and separate warehouse facility in
Indianapolis, Indiana from 129,000 square feet to approximately 64,000 square
feet and extended the lease on the property through February 2007. In addition,
the Company leases an approximately 192,000 square foot distribution center and
an approximately 29,000 square foot return center in Livermore, California, an
approximately 52,000 square foot repair facility in Wharton, New Jersey, and
approximately 87,000 square feet of office space in Roswell, Georgia. The lease
for the Livermore, California, distribution center expires in September 1999;
the lease for the Livermore, California, return center expires in June 1997; the
lease for the Wharton, New Jersey, premises expires in March 2004, subject to
one five-year option to renew held by the Company; and the lease for the
Roswell, Georgia, premises expires in May 1998. The Company leases other
properties that it does not consider material to its operations. The Company
believes that its facilities are suitable and adequate for its present
operations.
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RECENT DEVELOPMENTS
ACQUISITION OF DATAFLEX REGIONS
Effective May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Dataflex and of Dataflex's wholly-owned subsidiary, Dataflex Southwest
Corporation. The assets acquired and liabilities assumed comprise substantially
all of the assets and liabilities previously associated with the business
operations of Dataflex known as the Dataflex Western Region and Dataflex
Southwest Region. The two Dataflex Regions offer PC product distribution,
service and support in the states of Arizona, California, Colorado, Nevada, New
Mexico, and Utah and reported revenues of approximately $145 million for the
fiscal year ended March 31, 1996. The purchase price of the assets and
businesses acquired from Dataflex was approximately $42.0 million, subject to
certain post-closing adjustments. Of this amount, the Company paid approximately
$37.0 million in cash on May 29, 1996, with the remainder due following the
completion of an audit of the assets acquired and the liabilities assumed as of
May 31, 1996 and the completion of certain other post-closing matters.
AGREEMENT WITH DONALDSON, LUFKIN & JENRETTE FOR PAYMENT AGAINST MERISEL
RECEIVABLES
On May 24, 1996, the Company and Donaldson, Lufkin & Jenrette Securities
Corporation entered into an agreement pursuant to which the Company received
$15.6 million in exchange for providing Donaldson, Lufkin & Jenrette Securities
Corporation the right to receive an aggregate of $20 million in payments during
May, June and July of 1997 out of the amounts collected from receivables owed to
the Company by Merisel FAB under the distribution and services agreements dated
as of January 31, 1994, as amended, between the Company and Merisel. The Company
will continue to receive the related interest income from the Merisel
receivables.
ACQUISITION OF MENTOR TECHNOLOGIES, LTD.
Effective September 4, 1996, the Company consummated the acquisition of the
Mentor Partnership by merging (the "Mentor Merger") each of Mentor Technologies,
Inc., an Ohio corporation and the sole general partner of the Mentor Partnership
("Mentor"), and Cybernetics Tutor, Inc., an Ohio corporation and sole limited
partner of the Mentor Partnership ("Cybernetics"), with and into VST Midwest,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company. A total
of 300,000 shares of Company Common Stock (having an aggregate value on the
closing date of approximately $6.04 million) were issued in connection with the
Mentor Merger. Of these shares 27,000 shares of Company Common Stock will be
held in escrow until March 3, 1997 to satisfy certain indemnification
obligations of Mentor, Cybernetics and the Mentor Partnership. Any shares of
Company Common Stock remaining at the termination of the escrow will be
distributed pursuant to the terms of the merger agreement executed in connection
with the Mentor Merger. The Mentor Partnership designs, develops and implements
instructional programs to educate and familiarize individuals and corporations
with computers and computer software. Management of the Company anticipates that
this acquisition will strengthen the Company's ability to offer training and
education services in Ohio and throughout the upper midwestern United States.
For the calendar year ended December 31, 1995, the Mentor Partnership had
revenues of approximately $5.5 million.
ACQUISITION OF CONTRACT DATA SYSTEMS, INC.
On December 16, 1996, the Company consummated the merger of CDS with and
into a wholly owned subsidiary of the Company (the "CDS Merger"). The CDS Merger
will be accounted for by the Company under the "pooling of interests" method of
accounting. The aggregate consideration received by the shareholders of CDS in
connection with the CDS Merger consisted solely of 952,491 shares of Company
Common Stock (having an aggregate value on the closing date of approximately
$21.9 million). Ten percent (10%) of the shares issued in connection with the
CDS Merger (95,249 shares of Company
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Common Stock) are to be held in escrow for a period of approximately 10 months
to satisfy certain indemnification obligations of CDS. Pursuant to the terms of
the CDS Merger, the Company is obligated to file a Registration Statement on
Form S-1 with the Commission for the purpose of registering for resale the
shares of Company Common Stock acquired in the CDS Merger. The Company intends
to file such a Registration Statement during January 1997. The costs of
registration (other than brokerage commissions and similar expenses) will be
paid by the Company. CDS provides outsourcing of integrated information
technology services, related technical support services and procurement of
computer hardware and software. For the fiscal year ended March 31, 1996, CDS
reported total revenues of approximately $74.3 million.
SECURITIZATION FACILITY
On December 26, 1996, but effective December 20, 1996, the Company
consummated the Securitization Facility with Pooled Accounts Receivable Capital
Corporation, a commercial paper conduit sponsored by the Bank of Montreal (the
"Pool"), which provides the Company with up to $175 million in available credit.
Immediately after establishing the Securitization Facility, the Company through
a wholly-owned subsidiary, Vanstar Finance Co., sold an undivided interest in
certain covered accounts receivables (the "Covered Accounts Receivable") to the
Pool resulting in net proceeds to the Company of approximately $130.5 million,
of which approximately $105.5 million was used to repay a portion of the IBMCC
indebtedness. The remaining availability under the Securitization Facility is
intended to be used to provide working capital to the Company and for potential
future acquisitions of, or investments in, one or more businesses by the
Company. The Securitization Facility contemplates reinvestment by the Pool from
time to time in undivided interests in additional Covered Accounts Receivable of
the Company, to the extent of proceeds received by the Pool with regard to
previously purchased interests. The Pool purchases the undivided interests in
Covered Accounts Receivable for a purchase price based upon, among other things,
prevailing market interest rates at the time of reinvestment. Donaldson, Lufkin
& Jenrette Securities Corporation, one of the Initial Purchasers, acted as the
exclusive agent and financial advisor of the Company in connection with the
Securitization Facility. The Securitization Facility completes the Company's
refinancing plan that included the Original Offering and the Over-Allotment
Offering.
ACQUISITION OF CERTAIN ASSETS FROM DCT SYSTEMS, INC.
On January 9, 1997, the Company consummated the acquisition of inventory and
equipment from DCT Systems, Inc., a Minnesota corporation, Niloy, Inc., a
Georgia corporation, and NCT Systems, Inc., an Illinois corporation
(collectively, "DCT"). In connection therewith, DCT will receive cash equal to
the value of such assets (which is to be determined following the closing) and
180,000 restricted shares of Company Common Stock (the "DCT Shares"), which are
to be held in escrow. The Company currently anticipates that the cash portion of
the purchase price will equal between $3.0 and $5.0 million. Based on the
closing market price of the Company Common Stock on the closing date of the DCT
acquisition, the DCT Shares have an aggregate value of approximately $3.92
million. The DCT Shares will be released from escrow as follows: (i) 120,000 on
the first anniversary of the closing, (ii) 20,000 on the second anniversary of
the closing and (iii) 40,000 on the third anniversary of the closing, in each
case subject to the satisfaction of certain conditions described in a Servicing
and Marketing Agreement between the Company and DCT entered into on January 9,
1997 (the "Service Agreement"). Under the Service Agreement, the Company will
supply certain computer products and billing services to DCT. DCT may earn
commissions under the Service Agreement based upon the level of DCT's product
and service revenue, payable at the election of DCT in cash or restricted shares
of Company Common Stock (such number not to exceed 40,000 shares of Company
Common Stock). The Company has granted DCT certain "piggy-back" registration
rights relating to the DCT Shares. The costs of registration (other than
brokerage commissions and similar expenses) will be paid by the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus with respect to each person who is an executive officer or director
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
William Y. Tauscher(1)............. 46 Chairman of the Board and Chief Executive Officer
Jeffrey S. Rubin(1)(4)............. 53 Vice Chairman of the Board and Chief Financial Officer
Jay S. Amato....................... 37 President, Chief Operating Officer and Director
Richard N. Anderson................ 40 Senior Vice President and General Manager Life Cycle Services Group
H. Christopher Covington........... 47 Senior Vice President, General Counsel and Secretary
Robert C. Kuntzendorf.............. 51 Senior Vice President Operations
Chris M. Laney..................... 39 Senior Vice President Networking Services
Ahmad Manshouri.................... 56 Senior Vice President and General Manager Product Operations
Michael J. Moore................... 45 Senior Vice President Management Information Services
Coleman D. Sisson.................. 39 Senior Vice President and General Manager Learning Network
Thanos M. Triant................... 50 Senior Vice President and Chief Technology Officer
William R. Waas.................... 49 Senior Vice President Service
John W. Amerman(3)................. 64 Director
Richard H. Bard(1)(3).............. 49 Director
Stephen W. Fillo(2)................ 59 Director
Stewart K.P. Gross(1).............. 37 Director
William H. Janeway(3)(4)........... 53 Director
John R. Oltman(2).................. 51 Director
John L. Vogelstein................. 62 Director
Josh S. Weston(4).................. 68 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation and Stock Option Committee.
(4) Member of the Finance Committee.
JAY S. AMATO 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, he 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. Mr. Amato was previously the New York regional
manager and director of operations of The Computer Factory, Inc.
JOHN W. AMERMAN became a director in June 1996. He has served as Chairman
and Chief Executive Officer of Mattel, Inc., a leading toy manufacturer, since
1987. Prior to his chairmanship with Mattel, Inc.,
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Mr. Amerman served as President of Mattel International. Before joining Mattel
in 1980, Mr. Amerman was President of the American Chicle division of Warner
Lambert Corp., a consumer health care products company. Mr. Amerman is also a
member of the Board of Directors of Unocal Corporation, a worldwide energy
resources company, a member of the Board of Governors of the Hugh O'Brian Youth
Foundation and a member of the Board of Overseers of Dartmouth's Amos Tuck
School.
RICHARD N. ANDERSON became Senior Vice President in December 1993 and
General Manager Life Cycle Services Group in May 1996. He was Vice President,
Field Sales from October 1992 until December 1993. From July 1991 to October
1992, he was an Area Director for the Company, responsible for sales in the New
England area. From December 1983 until July 1991, he was a founder and Chief
Operating Officer of New England Computer Corporation, one of the largest
Company franchisees. Prior thereto, he was a Financial Systems Consultant for
Digital Equipment Corporation.
RICHARD H. BARD became a director of the Company in September 1987 and
served as Vice Chairman of the Board of Directors from July 1989 to December
1991. He has been a director and Chief Executive Officer of Optical Security
Group, Inc., a materials technology company, since September 1993, and became
President and Chairman of the Board of that company in April 1995. From July
1989 to December 1991, he served at different times in the capacities of
Director, Chairman, President and Chief Executive Officer of ComputerLand
International Development, Inc. Since 1991, he has also been Chief Executive
Officer of Bard & Co., Inc., a diversified investment management company. From
May 1986 until December 1988, he was Chairman and Chief Executive Officer of
CoastAmerica Corporation, a franchisor of hardware product stores. Prior to that
time, he was President and Chief Operating Officer of FoxMeyer Corporation,
which he co-founded in 1978. Mr. Bard is also a director of Builder Marts of
America Inc., a supplier of building materials, and Polymedica Industries, Inc.,
a manufacturer of health care products.
H. CHRISTOPHER COVINGTON 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, he was Assistant General Counsel
and Assistant Secretary of the Company. From January 1988 until November 1990,
he was a partner of the law firm of Hardin, Cook, Loper, Engel & Bergez.
STEPHEN W. FILLO became a director in September 1987. He has been President
of Fillo & Co., Inc., an independent investment firm, since December 1990. He
was a Managing Director of E.M. Warburg, Pincus & Co., Inc., a venture banking
and investment counselling firm, from 1981 to 1990. He is a director of LCI
International Inc., a long distance telephone carrier.
STEWART K.P. GROSS became a director in June 1994. Mr. Gross is a Managing
Director of E.M. Warburg, Pincus & Co., Inc. Mr. Gross has been with that firm
since July 1987 and has been a Managing Director since January 1993. He is a
director of OpenVision Technologies, Inc., a software company, and several
privately-held companies.
WILLIAM H. JANEWAY became a director in June 1994. He has been a Managing
Director and the head of the Venture Capital High Technology Team since 1988 of
E.M. Warburg, Pincus & Co., Inc. Mr. Janeway is a director of Maxis, Inc., an
entertainment software company, Zilog, Inc., a semiconductor manufacturer,
OpenVision Technologies, Inc., a software company, and several private
companies.
ROBERT C. KUNTZENDORF became Senior Vice President Operations in April 1990.
Before joining the Company, he served as Vice Chairman of FoxMeyer Corporation,
a wholesale pharmaceutical distributor and franchisor, which he joined in 1983.
CHRIS M. LANEY became Senior Vice President Networking Services in July
1995. From July 1993 until July 1995, he was Vice President Networking Services.
From April 1992 until July 1993, he was Western Regional Director of Networking
Services. From October 1989 until April 1992, he was Director of Networking
Services for Dataphaz, Inc., a Company franchisee.
52
<PAGE>
AHMAD MANSHOURI 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,
he was a Vice President of the Company. Prior thereto, he was the founder and
Vice President of Infomax, Inc., one of the largest Company franchisees.
MICHAEL J. MOORE became Senior Vice President Management Information
Services in January 1993. From May 1987 until January 1993, he was Vice
President Information Systems. Prior thereto, he was President and Chief
Executive Officer of The Software Place, a retailer of computer software.
JOHN R. OLTMAN became a director of the Company in June 1996. Mr. Oltman is
the former Chairman and Chief Executive Officer of SHL Systemhouse, Inc., a
provider of client/server consulting, systems integration and technology
outsourcing. Before joining SHL Systemhouse, Mr. Oltman was Worldwide Managing
Partner for Integration Services for Andersen Consulting and a member of
Andersen's Worldwide Organization Board of Directors. Mr. Oltman joined the
Arthur Andersen Worldwide Organization in 1970 and held a number of positions
within that firm, including Managing Partner for Andersen's Chicago Consulting
Group. Mr. Oltman is a director of TSW International and IA Corporation,
application software companies.
JEFFREY S. RUBIN became Vice Chairman in June 1995, Chief Financial Officer
in November 1995 and a director in July 1991. From May 1994 to February 1995,
Mr. Rubin was Senior Vice President, Business Development and Planning for GTE
Corporation. He was Executive Vice President and Chief Financial Officer of
NYNEX Corporation from 1993 until April 1994. From January 1991 to 1993, he was
Senior Vice President and Chief Financial Officer of NYNEX Corporation. From
March 1990 to January 1991, he was Vice President--Finance of NYNEX Corporation.
Mr. Rubin is a director of Shared Medical Systems Corporation, a medical
financial services company.
COLEMAN D. SISSON became Senior Vice President and General Manager Learning
Network in July 1995. From 1992 until July 1995, he was Vice President, Customer
Services for Powersoft Corp., a software company, and from 1987 until 1992, he
was the Training and Customer Service Manager of Compaq Computer Corporation.
WILLIAM Y. TAUSCHER 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, he was Chairman of the
Board, President and Chief Executive Officer of FoxMeyer Corporation, a
wholesale pharmaceutical distributor and franchisor that he co-founded in 1978
and a subsidiary of National Intergroup, Inc., a diversified holding
corporation. He is a director of The Vons Companies, Inc., a grocery store
chain.
THANOS M. TRIANT became Senior Vice President and Chief Technology Officer
for the Company in November 1995. Prior to joining the Company, Mr. Triant was
Vice President of Information Systems for the Times Mirror Company from January
1994 to November 1995. From January 1990 to January 1994, he was the Director of
Systems Architecture for Sun Microsystems Inc.
JOHN L. VOGELSTEIN became a director in January 1991. He has been President
of E.M. Warburg, Pincus & Co., Inc. since 1994, Vice Chairman of E.M. Warburg,
Pincus & Co., Inc. since 1982, President of Warburg, Pincus Ventures, Inc. since
1980 and a Partner of Warburg, Pincus & Co. since 1971. Mr. Vogelstein is a
director of ADVO, Inc., a direct mail marketing company, Aegis Group plc, a
media buying company, LCI International, Inc., a long distance telephone
carrier, Mattel, Inc., a toy manufacturer, Value Health, Inc., a managed care
company, and several private companies.
WILLIAM R. WAAS became Senior Vice President Service in July 1995. From
January 1989 until July 1995, he was Vice President Service. Prior to joining
the Company, he was Vice President of Systems Support of Grumman Data Systems
Corporation, a computer services company. He is currently Chairman of CompTIA,
an industry association.
53
<PAGE>
JOSH S. WESTON became a director of the Company in June 1996. Mr. Weston has
served as Chairman and Chief Executive Officer of Automatic Data Processing,
Inc., a computer services company, since 1985. Mr. Weston is also a member of
the Board of Directors of Public Service Enterprise Group Inc., an electric and
gas utility company, Olsten Corp., a provider of home health care and temporary
staffing services and Shared Medical Systems, a provider of health information
services.
Executive officers serve at the discretion of the Board of Directors. All
directors serve on the Board of Directors of the Company until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified. Non-employee directors receive reimbursement of out-of-pocket
expenses for attendance at Board meetings. In addition, certain directors may
receive stock options under the Company's stock option plans. See
"Management--Stock Option Plans."
The Board of Directors has established four committees. The Executive
Committee is comprised of Messrs. Tauscher, Rubin, Bard and Gross and generally
has all the powers of the Board of Directors, subject to limitations provided by
the Delaware General Corporation Law. The Audit Committee is comprised of
Messrs. Fillo and Oltman and oversees the activities of the Company's
independent auditors and reviews the Company's internal accounting procedures
and controls. The Compensation and Stock Option Committee is comprised of
Messrs. Amerman, Bard and Janeway and makes recommendations to the Board of
Directors with respect to general compensation and benefit levels, determines
the compensation and benefits for the Company's executive officers and
administers the Company's stock option plans. The Finance Committee is comprised
of Messrs. Rubin, Janeway and Weston and, in general, advises the Board with
regard to providing appropriate financing for the Company's activities,
including acquisitions.
54
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by its
Chief Executive Officer and the four other most highly compensated executive
officers of the Company (collectively, the Named Executive Officers) for
services rendered in all capacities to the Company during the fiscal years ended
April 30, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
AWARDS
ANNUAL COMPENSATION ----------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SARS (#)
- ------------------------------------- --------- ----------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
WILLIAM Y. TAUSCHER.................. 1995 550,008 30,000 -- 325,000(1)
CHAIRMAN OF THE BOARD AND CHIEF 1996 550,008 550,008 -- 1,187,434(1)
EXECUTIVE OFFICER
JAY S. AMATO......................... 1995 256,245 25,000 -- 47,726(1)
PRESIDENT AND CHIEF OPERATING
OFFICER 1996 312,498 312,293 -- 300,000(1)
JEFFREY S. RUBIN..................... 1995 -- -- -- 4,037(1)(5)
VICE CHAIRMAN OF THE BOARD AND
CHIEF 1996 243,756 242,424 -- 250,000(1)(6)
FINANCIAL OFFICER
AHMAD MANSHOURI...................... 1995 204,006 20,000 -- 15,000(1)
SENIOR VICE PRESIDENT AND GENERAL 1996 242,834 194,142 -- 75,000(1)
MANAGER PRODUCT OPERATIONS
RICHARD N. ANDERSON.................. 1995 182,508 20,000 1,940(7) 15,000(1)
SENIOR VICE PRESIDENT SALES 1996 219,168 175,258 -- 85,100(1)
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION ($)
- ------------------------------------- ------------------
<S> <C>
WILLIAM Y. TAUSCHER.................. 87,634(2)
CHAIRMAN OF THE BOARD AND CHIEF 1,566(3)
EXECUTIVE OFFICER
JAY S. AMATO......................... 1,014(3)
PRESIDENT AND CHIEF OPERATING
OFFICER 2,094(4)
JEFFREY S. RUBIN.....................
VICE CHAIRMAN OF THE BOARD AND
CHIEF 1,944(3)
FINANCIAL OFFICER
AHMAD MANSHOURI...................... 768(3)
SENIOR VICE PRESIDENT AND GENERAL 3,921(3)
MANAGER PRODUCT OPERATIONS
RICHARD N. ANDERSON.................. 1,669(8)
SENIOR VICE PRESIDENT SALES 2,105(9)
</TABLE>
- ------------------------------
(1) These shares are subject to exercise under stock options granted under the
Company's stock option plans.
(2) Comprised of $86,074 of forgiveness of interest on a promissory note payable
to the Company and $1,560 of premiums for insurance policies for which such
person is the beneficiary.
(3) Comprised of premiums for insurance policies where such persons are the
beneficiaries.
(4) Comprised of $1,500 matching contributions made to the Company's 401(k) plan
for the benefit of such person and $594 of premiums for insurance policies
for which such person is the beneficiary.
(5) Includes options to purchase 573 shares of Company Common Stock at a price
of $1.00 per share, options to purchase 2,309 shares of Company Common Stock
at a price of $4.51 per share and options to purchase 1,155 shares of
Company Common Stock at a price of $8.12 per share granted by CapCo to
Jeffrey S. Rubin.
(6) Includes options to purchase 7,457 shares at a price of $1.00 per share,
options to purchase 30,022 shares of Company Common Stock at a price of
$4.51 per share and options to purchase 15,011 shares of Company Common
Stock at a price of $8.12 per share granted by CapCo to Jeffrey S. Rubin.
(7) Comprised of $1,940 for relocation expenses.
(8) Comprised of a $967 matching contribution made to the Company's 401(k) plan
for the benefit of such person and $702 of premiums for insurance policies
for which such person is the beneficiary.
(9) Comprised of a $1,500 matching contribution made to the Company's 401(k)
plan for the benefit of such person and $605 of premiums for insurance
policies for which such person is the beneficiary.
55
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
pursuant to the Company's stock option plans granted to the Named Executive
Officers during fiscal year 1996. All options were granted at an exercise price
equal to the fair market value per share of the Company Common Stock on the date
of grant.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
INDIVIDUAL GRANTS RATES OF
--------------------------------------------------------------- STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION
SECURITIES OPTIONS/SARS FOR OPTION TERM
UNDERLYING GRANTED TO EXERCISE OR ($)(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH) DATE 5% 10%
- ------------------------------- ---------------- ----------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William Y. Tauscher............ 687,434(4)(5)(6) 23.2% 3.00 5/1/05 1,296,971 3,286,778
500,000(7) 16.9% 10.00 3/11/06 3,144,473 7,968,712
Jay S. Amato................... 300,000(6)(8) 10.1% 3.00 5/1/05 566,005 1,434,368
Jeffrey S. Rubin............... 250,000 8.4% 3.00 5/1/05 471,671 1,195,307
Ahmad Manshouri................ 75,000(6)(9) 2.5% 3.00 5/1/05 141,501 358,592
Richard N. Anderson............ 85,100(6)(10) 2.9% 3.00 5/1/05 160,557 406,882
</TABLE>
- ------------------------------
(1) All options vest in four or five equal annual installments, subject to
acceleration in the event of termination within six months of a change of
control (as defined in the Company's stock option plans), and have a term of
10 years.
(2) The Company granted options to purchase an aggregate of 2,966,943 shares of
Company Common Stock during fiscal year 1996.
(3) Potential realizable value is based on the assumption that the price of the
Company Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the 10-year option term.
The values are calculated in accordance with rules promulgated by the
Commission and do not reflect the Company's estimate of future stock price
appreciation.
(4) Includes options to purchase 325,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
(5) Includes options to purchase 362,434 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $5.55 per share.
(6) The options vest in 20% installments on each of May 1, 1995, 1996, 1997,
1998 and 1999, subject to acceleration in the event of termination within
six months of a change of control (as defined in the Company's stock option
plans).
(7) The options vest in 20% installments on each of May 1, 1996, 1997, 1998,
1999 and 2000, subject to acceleration in the event of termination within
six months of a change of control (as defined in the Company's stock option
plans).
(8) Includes options to purchase 56,726 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share and also includes options to purchase
43,274 shares of Company Common Stock at an exercise price of $3.00 per
share which were granted on May 1, 1995, in exchange for cancellation of
options to purchase a like number of shares at an exercise price of $5.55
per share.
(9) Includes options to purchase 15,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
(10) Includes options to purchase 20,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
The following table sets forth information with respect to each exercise of
stock options during fiscal 1996, by each of the Named Executive Officers and
the number of options held at fiscal year end and the aggregate value of
in-the-money options held at fiscal year end. None of the Named Executive
Officers exercised options in fiscal 1996.
56
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES ACQUIRED AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON EXERECISE VALUE -------------------------- -------------------------
NAME (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- --------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Y. Tauscher............ -- -- 237,487 949,947 1,794,487 7,297,937
Jay S. Amato................... -- -- 60,000 240,000 637,800 2,551,200
Jeffrey S. Rubin............... -- -- 50,000 200,000 531,500 2,126,000
Ahmad Manshouri................ -- -- 15,000 60,000 159,450 637,800
Richard N. Anderson............ -- -- 31,920 68,080 345,619 723,690
</TABLE>
- ------------------------------
(1) Based on the fair market value of the Company Common Stock at year end
($13.63 per share), as reported by the NYSE at the close of business on
April 30, 1996.
Directors who are full-time employees of the Company receive no additional
compensation for services rendered as members of the Board or committees
thereof. Directors who are not full-time employees of the Company receive
reimbursement of out-of-pocket expenses for attendance at Board meetings. All
directors who are not full-time employees of the Company, other than those
directors affiliated with E. M. Warburg, Pincus & Co., Inc., receive an annual
fee of $20,000 and a meeting fee of $1,000 per meeting attended. Each director
who receives a $20,000 annual fee may elect to forego the $20,000 annual payment
and, in lieu thereof, receive an option to purchase 5,000 shares of Company
Common Stock. Messrs. Amerman, Oltman and Weston received options to purchase
20,000 shares of Company Common Stock upon their appointment to the Board.
STOCK OPTION PLANS
1988 STOCK OPTION PLAN. In July 1988, the Company adopted a stock option
plan (as amended, the "1988 Stock Option Plan") providing for the issuance to
key employees and directors of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
stock options that are non-qualified for federal income tax purposes. The 1988
Stock Option Plan is administered by the Compensation and Stock Option
Committee, which is comprised of Messrs. Amerman, Janeway and Bard. The
Compensation and Stock Option Committee may, in its discretion, grant tandem
stock appreciation rights that give the employee the right to elect an
alternative payment equal to the appreciation of the stock value instead of
exercising the stock options. Members of the Compensation and Stock Option
Committee are not eligible to receive options under the 1988 Stock Option Plan.
The total number of shares of the Company Common Stock for which options could
have been granted pursuant to the 1988 Stock Option Plan was previously
2,300,000; however, in connection with the adoption of the 1996 Option Plan (as
hereinafter defined) the Board reduced the number of shares of Company Common
Stock issuable under the 1988 Stock Option Plan by 200,000 shares and indicated
its intention that substantially all future grants be made under the 1996 Option
Plan.
To the extent future stock options are granted under the 1988 Stock Option
Plan the exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company Common Stock at the time of grant and the
term of any option may not exceed 10 years. With respect to any employee who
owns stock representing more than 10% of the voting power of the outstanding
capital stock of the Company, the exercise price of any incentive stock option
may not be less than 110% of the fair market value of such shares at the time of
grant and the term of such option may not exceed five years. The exercise price
of a non-qualified stock option is determined by the Compensation and Stock
Option Committee at the time such option is granted.
Options granted under the 1988 Stock Option Plan are nontransferable and,
with certain exceptions in the event of the death or disability of an optionee,
may be exercised by the optionee only during employment or within the one or
three month period immediately following termination of employment.
57
<PAGE>
Options granted under the 1988 Stock Option Plan typically vest over a four- or
five-year period, subject to acceleration in the event of termination within six
months of a change of control (as defined in the plan), and expire after 10
years.
1993 STOCK OPTION/STOCK ISSUANCE PLAN. In April 1993, the Company adopted a
stock option/stock issuance plan (the "1993 Stock Plan"; and the 1988 Stock
Option Plan and the 1993 Stock Plan, collectively, the "Old Stock Option Plans")
providing for the issuance to highly compensated, managerial employees, officers
and directors of incentive stock options within the meaning of Section 422 of
the Code, stock options that are non-qualified for federal income tax purposes
and performance bonus shares of Company Common Stock. The 1993 Stock Plan is
administered by the Compensation and Stock Option Committee. The Compensation
and Stock Option Committee may, in its discretion, grant tandem stock
appreciation rights that give the employee the right to elect an alternative
payment equal to the appreciation of the stock value instead of exercising the
stock options. Members of the Compensation and Stock Option Committee are not
eligible to receive options under the 1993 Stock Plan. The total number of
shares of Company Common Stock originally issuable pursuant to the 1993 Stock
Plan, whether under options or directly, was 2,500,000; however, in connection
with the adoption of the 1996 Option Plan, the Board reduced the number of
shares of Company Common Stock issuable under the 1993 Stock Plan by 100,000
shares and indicated its intention that substantially all future grants be made
under the 1996 Option Plan.
To the extent future stock options are granted under the 1993 Stock Plan,
the exercise price and term of incentive stock options are subject to the same
limitations described above with respect to the 1988 Stock Option Plan. The
option price of a non-qualified stock option is determined by the Compensation
and Stock Option Committee at the time such option is granted; provided that the
exercise price of non-qualified stock options granted under the 1993 Stock Plan
and the purchase price of shares of Company Common Stock issued under such Plan
may not be less than 85% of the fair market value of the Company Common Stock at
the time of grant or issuance. As an additional component of the 1993 Option
Plan, shares of Company Common Stock may be issued under the 1993 Stock Plan as
a performance bonus.
Options granted under the 1993 Stock Plan are nontransferable and, with
certain exceptions in the event of the death or disability of an optionee, may
be exercised by the optionee only during employment or within a one or three
month period immediately following termination of employment. Options granted
under the 1993 Stock Plan typically vest over a four- or five-year period,
subject to acceleration in the event of termination within six months of a
change of control (as defined in the plan), and expire after 10 years.
Although future grants under the Old Stock Option Plans may be made, the
Board of Directors of the Company intends that substantially all future stock
option grants will be made pursuant to the 1996 Option Plan. Grants under the
Old Stock Option Plans will only be made to the extent of the shares remaining
reserved thereunder and to the extent that currently outstanding options
thereunder expire or are cancelled without being fully exercised, in which case
the underlying shares become available for future grants under the respective
terms of such plans. As of October 31, 1996 options exercisable for 1,788,254
shares of Company Common Stock were issued under the 1988 Stock Option Plan and
options exercisable for 2,289,739 shares of Company Common Stock were issued
under the 1993 Stock Plan.
1996 STOCK OPTION/STOCK ISSUANCE PLAN. In August 1996, the Company adopted
the 1996 Stock Option/Stock Issuance Plan (as amended, the "1996 Option Plan"),
which provides for the grant to directors, officers and employees of the Company
and independent consultants retained by the Company, of stock options, including
both incentive stock options and non-qualified stock options, and direct grants
of Company Common Stock. The maximum aggregate number of shares of Company
Common Stock reserved for issuance under the 1996 Option Plan is 3,300,000
shares.
Similar to the 1993 Option Plan, the 1996 Option Plan is divided into two
separate components: the "Option Grant Program" and the "Stock Issuance
Program." Under the Option Grant Program, eligible individuals may be granted
options to purchase shares of the Company Common Stock at an exercise price
58
<PAGE>
to be determined by the Compensation and Stock Option Committee (except that, in
the case of an incentive stock option, such exercise price may not be less than
100% (or 110% in the case of an incentive stock option granted to a 10%
stockholder)) of the fair market value of the Company Common Stock on the date
of grant. Under the Stock Issuance Program, eligible individuals may be issued
shares of Company Common Stock directly, either through the immediate purchase
of such shares at a price to be determined by the Compensation and Stock Option
Committee or as a bonus tied to the performance of services or the Company's
attainment of financial objectives, without any cash payment required of the
recipient. Such shares may be fully vested when issued or may vest over time.
The 1996 Option Plan is administered by the Compensation and Stock Option
Committee. The Compensation and Stock Option Committee has full authority to
determine (i) with respect to the option grants, the number of shares to be
covered by each such grant, the per share exercise price thereof, the status of
the granted option as either an incentive stock option or a non-qualified stock
option, the time or times at which each granted option is to become purchasable
under the option and the maximum term for which the option may remain
outstanding, and (ii) with respect to share issuances under the Stock Issuance
Program, the number of shares to be issued to each participant, the vesting
schedule (if any) to be applicable to the issued shares and the consideration to
be paid by the individual for such shares. The Compensation and Stock Option
Committee has the absolute discretion either to grant options in accordance with
the Option Grant Program or to effect share issuances in accordance with the
Stock Issuance Program. Options granted and stock issued pursuant to the 1996
Option Plan are evidenced by instruments (which need not be identical) in such
form as the Compensation and Stock Option Committee may, from time to time,
authorize. As allowed by the 1996 Plan, the Compensation and Stock Option
Committee has delegated to the Company's Chairman and Chief Executive Officer
the authority to make option grants and share issuances to persons who are not
subject to the reporting requirements of Section 16 of the Exchange Act with
respect to the Company.
Options granted pursuant to the 1996 Option Plan will be exercisable at such
rate as may be determined by the Compensation and Stock Option Committee.
Options granted under the 1996 Option Plan will generally expire after ten
years, unless terminated earlier or as otherwise determined by the Compensation
and Stock Option Committee at the time of grant. Options granted under the 1996
Option Plan will be nontransferable and, with certain exceptions in the event of
the death or disability of an optionee, may be exercised by the optionee only
during employment or within the one to three month period following termination
of employment in accordance with the plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted, effective with its IPO, an employee stock purchase plan
(the "Stock Purchase Plan"). Under the Stock Purchase Plan, eligible employees
are granted options (exercisable by electing to participate in the plan) to
purchase shares of Company Common Stock generally through regular payroll
deductions. The Stock Purchase Plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Code. The total number of shares of
Company Common Stock that are authorized for issuance under the Stock Purchase
Plan is 1,000,000. All full-time and certain part-time employees of the Company
are eligible to participate in the Stock Purchase Plan, subject to certain
limited exceptions. Options are granted generally every six months to eligible
employees and, if not exercised, expire on the last day of the sixth-month
period in which granted. Employees electing to participate for any semi-annual
period authorize payroll deductions at a stated whole percentage ranging from 2%
to 10% of compensation, as determined by the participant. Options are
nontransferable other than by will or by operation of the laws of descent and
distribution. The purchase price for shares offered under the Stock Purchase
Plan each year will be equal to a percentage designated by the Board of
Directors (not less than 85%) of the lower of the fair market value of Company
Common Stock at the date of grant or the semi-annual date of exercise as
evidenced by the initial public offering price per share in the case of options
granted on the date of the IPO ($10.00 per share) or, in all other cases, by the
closing price of Company Common Stock
59
<PAGE>
on such date as reported on the NYSE. The Stock Purchase Plan will expire on
March 11, 2006, unless sooner terminated by the Board of Directors or all shares
of Company Common Stock available for issuance under the Stock Purchase Plan
have been sold. The Board of Directors of the Company may amend, suspend or
terminate the Stock Purchase Plan at any time and from time to time, subject to
certain limitations. The Stock Purchase Plan is administered by the Compensation
and Stock Option Committee.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company Common Stock as of November 29, 1996 by (i) each person
known to the Company to own beneficially more than 5% of the outstanding Company
Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise stated, the Company believes that each of the beneficial owners named
in the table has sole voting and investment power with respect to all shares
beneficially owned by such stockholder as set forth opposite such stockholder's
name, subject to applicable community property laws. Except as noted below, the
address of each director and Named Executive Officer is c/o Vanstar Corporation,
5964 West Las Positas Blvd., Pleasanton, California 94588.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------
SHARES OF
NAME OF BENEFICIAL OWNER COMMON STOCK PERCENT (1)
- ---------------------------------------------------------------- --------------- -------------
<S> <C> <C>
Warburg, Pincus Capital Company, L.P. (2)....................... 13,878,401.21 33.5%
466 Lexington Avenue
10th Floor
New York, NY 10017
William Y. Tauscher (3)......................................... 2,370,284.49 5.7
Jeffrey S. Rubin (4)............................................ 188,833.00 *
Ahmad Manshouri (5)............................................. 62,722.00 *
Richard N. Anderson (6)......................................... 7,801.00 *
Richard H. Bard (7)............................................. 667,528.26 1.6
Stephen W. Fillo (8)............................................ 5,000.00 *
Stewart K.P. Gross (9)(2)....................................... 13,878,401.21 33.5
William H. Janeway (9)(2)....................................... 13,878,401.21 33.5
John L. Vogelstein (9)(2)....................................... 13,878,401.21 33.5
Jay S. Amato (10)............................................... 164,998.50 *
John W. Amerman (11)............................................ 9,000.00 *
Josh S. Weston (11)............................................. 9,000.00 *
John R. Oltman (11)............................................. 9,000.00 *
All directors and executive officers as a group (20 persons)
(12)(9)....................................................... 17,426,624.69 40.8
</TABLE>
- ------------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 41,466,199 shares of Company
Common Stock outstanding as of November 29, 1996, together with the
applicable options for such stockholder. Beneficial ownership is determined
in accordance with the rules of the Commission and generally includes voting
or investment power with respect to securities, subject to community
property laws, where applicable. Shares of Company Common Stock subject to
options that are presently exercisable or exercisable within 60 days are
deemed to be beneficially owned by the person holding such options for the
purpose of computing the percentage of ownership of such person but are not
treated as outstanding for the purpose of computing the percentage of any
other person.
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(2) The sole general partner of CapCo is Warburg, Pincus & Co., a New York
general partnership ("WP"). Lionel I. Pincus is the Managing Partner of WP
and may be deemed to control WP. E.M. Warburg Pincus & Co., Inc. ("EMWP"),
through a wholly-owned subsidiary, manages CapCo. WP owns all of the
outstanding stock of EMWP and, as the general partner of CapCo, has a 20%
interest in the profits of CapCo. EMWP owns 0.9% of the limited partnership
interests in CapCo. Number of shares includes 84,794 shares that are subject
to options granted to Jeffrey S. Rubin as described under note (4) below.
(3) Includes 374,974 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock options
plans that are either presently exercisable or become exercisable within 60
days.
(4) Includes 100,000 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days,
50,810 shares subject to exercise within 60 days under a presently-
exercisable stock option issued by CapCo, exercisable at $4.51 per share
until 2005, 25,403 shares subject to exercise within 60 days under a
presently-exercisable stock option issued by CapCo, exercisable at $8.12 per
share until 2005, 955 shares subject to exercise within 60 days under a
presently-exercisable stock option issued by CapCo, exercisable at $1.00 per
share until 2000, and 11,665 shares subject to exercise within 60 days under
a presently-exercisable stock option issued by CapCo, exercisable at $1.00
per share until 2005.
(5) Includes 37,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days
and 1,494 shares of Company Common Stock held for the benefit of Mr.
Manshouri in an employee plan formerly sponsored by Infomax, Inc. Also
includes 11,933 shares held of record by or for the benefit of Mr.
Manshouri's wife.
(6) Includes 7,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(7) Includes 367,434 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(8) Consists of 5,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
Pursuant to an arrangement between WP and Mr. Fillo, Mr. Fillo has an
indirect pecuniary interest in the capital stock of the Company owned by
CapCo. Mr. Fillo disclaims beneficial ownership of all such capital stock
within the meaning of the Exchange Act.
(9) Mr. Gross, Mr. Janeway and Mr. Vogelstein, directors of the Company, are
Managing Directors of EMWP and general partners of WP. As such, Mr. Gross,
Mr. Janeway and Mr. Vogelstein may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act), in an
indeterminate portion of the shares beneficially owned by CapCo. All of the
shares indicated as owned by Mr. Gross, Mr. Janeway and Mr. Vogelstein are
owned beneficially by CapCo and are included because of the affiliation of
such persons with CapCo. Mr. Gross, Mr. Janeway and Mr. Vogelstein disclaim
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Exchange Act.
(10) Includes 140,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
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(11) Includes 9,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(12) Includes 1,196,956 shares of Company Common Stock reserved for issuance
upon exercise of stock options granted under the Company's stock option
plans that are either presently exercisable or become exercisable within 60
days.
CERTAIN TRANSACTIONS
In March 1993, the Company sold and issued an aggregate of (i) 1,538,462
shares of Company Common Stock to WP CapCo, Inc., then a wholly-owned subsidiary
of CapCo, (ii) warrants to purchase an aggregate of 3,846,155 shares of Company
Common Stock to CapCo, (iii) 307,692 shares of Company Common Stock and warrants
to purchase an aggregate of 769,230 shares of Company Common Stock to William Y.
Tauscher, Chairman of the Board and Chief Executive Officer, and (iv) 769,230
shares of Company Common Stock and warrants to purchase an aggregate of
1,923,075 shares of Company Common Stock to Nynex Worldwide Services Group, Inc.
("Nynex Worldwide Services"). The foregoing shares were sold at $6.00 per share
and the foregoing warrants (the "1993 Warrants") were sold at a purchase price
of $.20 per warrant share, with an exercise price of $11.00 per share and a term
of ten years. Mr. Tauscher paid for such shares and 1993 Warrants by delivering
to the Company a $1,999,690 principal amount promissory note (the "Tauscher
Note") and paid the balance in cash. The Tauscher Note was secured by the shares
and 1993 Warrants purchased. On March 17, 1994, Mr. Tauscher repaid $1,000,000
of the aggregate principal amount of the Tauscher Note. In May 1994, the Company
repurchased from Mr. Tauscher an aggregate of 153,846 shares of Company Common
Stock and 1993 Warrants to purchase an aggregate of 384,615 shares of Company
Common Stock at a price of $6.00 per share and $.20 per Warrant share (or an
aggregate purchase price of $999,690). Such purchase price was paid by
cancellation of $999,690 of the principal amount of the Tauscher Note.
Simultaneously, the Company forgave $86,074 of interest accrued on the Tauscher
Note.
Upon consummation of the IPO, all of the 1993 Warrants that were outstanding
and additional warrants (the "1990 Warrants") originally issued by the Company
with an exercise price of $8.32 per share and a term expiring in 2000 were
exchanged for shares of Company Common Stock. The 1990 Warrants were issued to
CapCo to purchase an aggregate of 339,282.32 shares of Company Common Stock, to
William Y. Tauscher to purchase an aggregate of 72,703.35 shares of Company
Common Stock and to Richard H. Bard, a director of the Company, to purchase an
aggregate of 72,703.35 shares of Company Common Stock. Effective upon
consummation of the IPO the 1993 Warrants were exchanged for 2,545,151 and
254,515 shares of Company Common Stock, respectively, in respect of the 1993
Warrants held by CapCo and Mr. Tauscher and for 295,858 shares of Company Common
Stock in respect of the 1993 Warrant held by Nynex Worldwide Services. The 1990
Warrants were exchanged for an aggregate of 297,558 shares of Company Common
Stock. In addition, warrants to purchase an aggregate 54,261 shares of Company
Common Stock at an exercise price of $5.00 per share with a term expiring in May
2000 held by CapCo were exchanged for an aggregate of 39,966 shares of Company
Common Stock in connection with the IPO.
In June 1993, the Company issued 577,083 shares of Company Common Stock (at
a rate of $6.00 per share) to Nynex Worldwide Services in satisfaction of
certain accrued and unpaid dividends due June 1993 on the Senior Preferred Stock
held by Nynex Worldwide Services; and on October 1, 1994, the Company issued a
$2,462,500.25 promissory note to Nynex Worldwide Services and paid Nynex
Worldwide Services $1,000,000, which note and cash payment were delivered in
satisfaction of the accrued and unpaid dividends due June 1, 1994 on the Senior
Preferred Stock held by Nynex Worldwide Services. Such note, which matured on
June 1, 1995 and bore interest at a rate of 9.75%, was cancelled in exchange for
a cash payment of $2,462,500.25 plus accrued and unpaid interest out of funds
received in connection with the IPO, and such shares of Senior Preferred Stock
were converted on a one-for-one basis into shares of
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Company Common Stock that were sold by Nynex Worldwide Services in the IPO (and
accrued and unpaid dividends thereon were forgiven).
In October 1993, the Company made a $150,000 interest-free loan to Robert
Kuntzendorf, an executive officer, to finance the purchase of a home. Such loan
was repaid in full in June 1994.
In July 1992, in connection with the purchase of a former Company
franchisee, the Company received a three year non-recourse promissory note in
the principal amount of $333,333.00 from Ahmad Manshouri, an executive officer,
and his wife. Payment of such note was secured by the pledge of 27,778 shares of
Company Common Stock held by Mr. and Mrs. Manshouri. In October 1995, Mr. and
Mrs. Manshouri transferred all of the pledged shares to the Company in lieu of
making payment on such note.
The Company has granted options to purchase Company Common Stock to certain
of its executive officers and directors. See "Management--Executive
Compensation."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors of the Board of
Directors.
DESCRIPTION OF THE PREFERRED SECURITIES
The following summary of certain material terms and provisions of the
Preferred Securities does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Declaration. The Preferred
Securities were issued pursuant to the terms of the Declaration. The Declaration
incorporates by reference terms of the Trust Indenture Act. The Declaration was
qualified under the Trust Indenture Act upon effectiveness of the Registration
Statement to which this Prospectus forms a part. The Property Trustee will act
as indenture trustee for the Declaration for purposes of compliance with the
Trust Indenture Act. Capitalized terms not otherwise defined herein have the
meanings assigned to them in the Declaration.
GENERAL
The Preferred Securities were issued in fully registered form without
interest coupons. Bearer Preferred Securities were not issued.
The Declaration authorized the Regular Trustees to issue the Trust
Securities on behalf of the Trust. The Preferred Securities represent undivided
beneficial ownership interests in the assets of the Trust and entitle the
holders thereof to a preference in certain circumstances with respect to
distributions and amounts payable on redemption or liquidation over the Common
Securities, as well as other benefits as described in the Declaration.
All of the Common Securities are owned by the Company. The Common Securities
rank PARI PASSU, and payments will be made thereon on a PRO RATA basis, with the
Preferred Securities, except that upon the occurrence of a Declaration Event of
Default, the rights of the holders of the Common Securities to receive payment
of periodic distributions and payments upon liquidation, redemption and
otherwise will be subordinated to the rights of the holders of Preferred
Securities. See "--Subordination of Common Securities." Title to the Convertible
Debentures is held by the Property Trustee for the benefit of the holders of the
Trust Securities. The Declaration does not permit the issuance by the Trust of
any securities other than the Trust Securities or the incurrence of any
indebtedness by the Trust. The payment of distributions out of money held by the
Trust, and payments upon redemption of the Preferred Securities or liquidation
of the Trust, are guaranteed by the Company to the extent described under
"Description of the Guarantee." The Guarantee is held by the Guarantee Trustee
for the benefit of the holders of the Preferred Securities. The Guarantee does
not cover payment of distributions when the Trust does not have
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<PAGE>
sufficient available funds to pay such distributions. In such event, the remedy
of a holder of Preferred Securities is to (i) vote to direct the Property
Trustee to enforce the Property Trustee's rights under the Convertible
Debentures or (ii) if the failure of the Trust to pay distributions is
attributable to the failure of the Company to pay interest or principal on the
Convertible Debentures, to institute a proceeding directly against the Company
for enforcement of payment to such holder of the principal of or interest on the
Convertible Debentures having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities of such holder on or after the
respective due date specified in the Convertible Debentures. See "--Voting
Rights."
DISTRIBUTIONS
Distributions on Preferred Securities are fixed at a rate per annum of
6 3/4% of the stated liquidation amount of $50 per Preferred Security.
Distributions in arrears for more than one quarter will bear interest thereon at
a rate per annum of 6 3/4 thereof compounded quarterly. The term "distribution"
as used herein includes any such interest (including any Additional Interest and
Liquidated Damages, each as defined herein) payable unless otherwise stated. The
amount of distributions payable for any period is computed on the basis of a
360-day year of twelve 30-day months.
Distributions on the Preferred Securities are cumulative, accrue from the
Original Offering Date and are payable quarterly in arrears on each January 1,
April 1, July 1 and October 1, when, as and if available for payment, by the
Property Trustee, except as otherwise described below. The first distribution on
the Preferred Securities was paid January 2, 1997. The Company has the right
under the Indenture to defer interest, during which period no interest shall be
due and payable. As a consequence of such extension, quarterly distributions on
the Preferred Securities would be deferred (though such distributions would
continue to accrue with interest) during any such extended interest payment
period. In the event that the Company exercises this right, then, during such
period, the Company (a) shall not, and shall not allow any of its subsidiaries
(other than its wholly-owned subsidiaries) to, declare or pay dividends on, make
distributions with respect to, or redeem, purchase or acquire, or make a
liquidation payment with respect to, any of its capital stock (except for (i)
dividends or distributions in shares of Company Common Stock on Company Common
Stock or on its Preferred Stock, (ii) purchases or acquisitions of shares of
Company Common Stock made in connection with any employee benefit plan of the
Company or its subsidiaries in the ordinary course of business or pursuant to
employment agreements with officers or employees of the Company or its
subsidiaries entered into in the ordinary course of business, provided that such
repurchases by the Company made from officers or employees of the Company or its
subsidiaries pursuant to employment agreements shall be made at a price not to
exceed market value on the date of any such repurchase and shall not exceed $1
million in the aggregate for all such employees and officers, (iii) conversions
or exchanges of common stock of one class into common stock of another class or
(iv) purchases of fractional interests in shares of the Company's capital stock
pursuant to the conversion or exchange provisions of any of the Company's
securities being converted or exchanged), (b) shall not, and shall not allow any
of its subsidiaries to, make any payment of interest, principal of or premium,
if any, on, or repay, repurchase or redeem any debt securities issued by the
Company that rank junior to or PARI PASSU with the Convertible Debentures and
(c) shall not, and shall not allow any of its subsidiaries to, make any
guarantee payments with respect to the foregoing (other than such payments made
pursuant to the Guarantee). Prior to the termination of any such Extension
Period, the Company may further extend such Extension Period; PROVIDED, HOWEVER,
that such Extension Period, together with all previous and further extensions
thereof, may not exceed 20 consecutive quarters and that such Extension Period
may not extend beyond the maturity date of the Convertible Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject to the above requirements.
Consequently, there could be multiple Extension Periods of varying lengths
throughout the term of the Convertible Debentures. See "Description of the
Convertible Debentures-- Interest" and "Description of the Convertible
Debentures--Option to Extend Interest Payment Period." If distributions are
deferred, the deferred distributions and accrued interest thereon shall be paid
to the
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holders of record of Preferred Securities as they appear on the books and
records of the Trust on the record date next following the termination of such
deferral period.
Distributions on the Preferred Securities will be made to the extent that
the Trust has funds available for the payment of such distributions in the
Property Account. Amounts available to the Trust for distribution to the holders
of the Preferred Securities will be limited to payments received by the Trust
from the Company for the Convertible Debentures net of taxes, if any, imposed on
the Trust with respect thereto. See "Description of the Convertible Debentures."
The payment of distributions out of funds held by the Trust is guaranteed by the
Company, as set forth under "Description of the Guarantee."
Distributions on the Preferred Securities will be payable to the holders
thereof as they appear on the books and records of the Trust on the relevant
record dates, which will be fifteen days prior to the relevant payment dates.
Subject to any applicable laws and regulations and the provisions of the
Declaration, each such payment will be made as described under "--Book-Entry
Only Issuance--The Depository Trust Company" below. In the event that any date
on which distributions are payable on the Preferred Securities is not a Business
Day, payment of the distribution payable on such date will be made on the next
succeeding day which is a Business Day (without any distribution or other
payment in respect of any such delay), except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. A "Business Day" shall mean any day other than a day on which
banking institutions in New York, New York, San Francisco, California or
Wilmington, Delaware are authorized or required by law to close.
CONVERSION RIGHTS
GENERAL. Each Preferred Security is convertible at any time prior to the
close of business on the Business Day immediately preceding the date of
repayment of such Preferred Security, whether at maturity or upon redemption, at
the option of the holder thereof and in the manner described below, into the
number of shares of Company Common Stock obtained by dividing the liquidation
amount of such Preferred Security ($50 per Preferred Security) by the applicable
conversion price (initially $28.75 per share of Company Common Stock), rounded
to the nearest thousandth of a share (equivalent to a conversion rate of 1.739
shares of Company Common Stock per Preferred Security). The conversion price is
subject to adjustment as described under "--Conversion Price
Adjustments--General" and "--Conversion Price Adjustment--Merger, Consolidation
or Sale of Assets of the Company" below. The Trust has covenanted in the
Declaration not to convert Convertible Debentures held by it except pursuant to
a notice of conversion delivered to the Property Trustee, as conversion agent
(the "Conversion Agent"), by a holder of Preferred Securities. A holder of a
Preferred Security wishing to exercise its conversion right shall deliver an
irrevocable conversion notice, together, if the Preferred Security is a
Certificated Security (as defined herein), with such Certificated Security, to
the Conversion Agent, which shall, on behalf of such holder, exchange such
Preferred Security for a portion of the Convertible Debentures and immediately
convert such Convertible Debentures into Company Common Stock. Holders may
obtain copies of the required form of the conversion notice from the Conversion
Agent. Procedures for converting book-entry Preferred Securities into shares of
Company Common Stock will differ, as described under "--Book-Entry Only
Issuance--The Depository Trust Company."
Holders of Preferred Securities at the close of business on a distribution
record date will be entitled to receive the distribution payable on such
Preferred Securities on the corresponding distribution payment date
notwithstanding the conversion of such Preferred Securities following such
distribution record date but prior to such distribution payment date. Except as
provided in the immediately preceding sentence, neither the Trust nor the
Company will make, or will be required to make, any payment, allowance or
adjustment for accumulated and unpaid distributions, whether or not in arrears,
on the converted Preferred Securities. The Company will make no payment or
allowance for distributions on the shares of Company Common Stock issued upon
such conversion, except to the extent that such shares of Company
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Common Stock are held of record on the record date for any such distributions
and except as provided in the preceding sentence. Each conversion will be deemed
to have been effected immediately prior to the close of business on the day on
which the related conversion notice was received by the Conversion Agent.
No fractional shares of Company Common Stock will be issued as a result of
conversion, but in lieu thereof such fractional interest will be paid by the
Company in cash based on the last reported sale price of Company Common Stock on
the date such Preferred Securities are surrendered for conversion.
CONVERSION PRICE ADJUSTMENTS--GENERAL. The conversion price is subject to
adjustment in certain events, including (a) the issuance of shares of Company
Common Stock as a dividend or a distribution with respect to Company Common
Stock, (b) subdivisions, combinations and reclassification of Company Common
Stock, (c) the issuance to all holders of Company Common Stock of rights or
warrants entitling them (for a period not exceeding 45 days) to subscribe for
shares of Company Common Stock at less than the then Current Market Price (as
defined below) of the Company Common Stock, (d) the distribution to holders of
Company Common Stock of evidences of indebtedness of the Company, securities or
capital stock, cash or assets (including securities, but excluding those rights,
warrants, dividends and distributions referred to above and dividends and
distributions paid exclusively in cash), (e) the payment of dividends (and other
distributions) on Company Common Stock paid exclusively in cash, excluding cash
dividends if the annualized per share amount thereof does not exceed 10% of the
Current Market Price of Company Common Stock as of the trading day immediately
preceding the date of declaration of such dividend (such adjustment being
limited to the amount in excess of 10% of such Current Market Price), and (f)
payment to holders of Company Common Stock in respect of a tender or exchange
offer by the Company or any subsidiary for Company Common Stock at a price in
excess of the then Current Market Price of Company Common Stock as of the
trading day next succeeding the last date tenders or exchanges may be made
pursuant to such tender or exchange offer. "Current Market Price" means the
average of the daily closing prices for the five consecutive trading days
selected by the Company commencing not more than 20 trading days before, and
ending not later than, the earlier of the day in question or, if applicable, the
day before the "ex" date with respect to the issuance or distribution in
question.
The Company from time to time may reduce the conversion price of the
Convertible Debentures (and thus the conversion price of the Preferred
Securities) by any amount selected by the Company for any period of at least 20
days, in which case the Company shall give at least 15 days' notice of such
reduction. The Company may, at its option, make such reductions in the
conversion price, in addition to those set forth above, as the Company's Board
of Directors deems advisable to avoid or diminish any income tax to holders of
Company Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income tax
purposes. See "Certain United States Federal Income Tax
Considerations--Adjustment of Conversion Price."
No adjustment of the conversion price will be made upon the issuance of any
shares of Company Common Stock pursuant to any present or future plan providing
for the reinvestment of dividends or interest payable on securities of the
Company and the investment of additional optional amounts in shares of Company
Common Stock under any such plan. No adjustment in the conversion price will be
required unless such adjustment would require a change of at least one percent
(1%) in the price then in effect; PROVIDED, HOWEVER, that any adjustment that
would not be required to be made shall be carried forward and taken into account
in any subsequent adjustment. If any action would require adjustment of the
conversion price pursuant to more than one of the provisions described above,
only one adjustment shall be made and such adjustment shall be the amount of
adjustment that has the highest absolute value to the holder of the Preferred
Securities.
CONVERSION PRICE ADJUSTMENT--MERGER, CONSOLIDATION OR SALE OF ASSETS OF THE
COMPANY. In the event that any transaction shall occur (including, without
limitation, and with certain exceptions, (a) recapitalization or
reclassification of the Company Common Stock, (b) consolidation of the Company
with, or merger of the Company into, any other Person, or any merger of another
Person into the
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Company, (c) any sale, transfer or lease of all or substantially all of the
assets of the Company or (d) any compulsory share exchange) pursuant to which
either shares of Company Common Stock shall be converted into the right to
receive other securities, cash or other property, or, in the case of a sale or
transfer of all or substantially all of the assets of the Company, the holders
of Company Common Stock shall be entitled to receive other securities, cash or
other property, then appropriate provision shall be made so that the holder of
each Preferred Security then outstanding shall have the right thereafter to
convert such Preferred Security only into:
(x) in the case of any such transaction that does not constitute a
Common Stock Fundamental Change (as defined below) and subject to funds
being legally available for such purpose under applicable law at the time of
such conversion, the kind and amount of the securities, cash or other
property that would have been receivable upon such recapitalization,
reclassification, consolidation, merger, sale, transfer or share exchange by
a holder of the number of shares of Company Common Stock issuable upon
conversion of such Preferred Security immediately prior to such
recapitalization, reclassification, consolidation, merger, sale, transfer or
share exchange, after giving effect, in the case of any Non-Stock
Fundamental Change (as defined below), to any adjustment in the conversion
price in accordance with clause (i) of the following paragraph, and
(y) in the case of any such transaction that constitutes a Common Stock
Fundamental Change, common stock of the kind received by holders of Company
Common Stock as a result of such Common Stock Fundamental Change in an
amount determined in accordance with clause (ii) of the following paragraph.
The Company shall require that the Person formed by such consolidation or
resulting from such merger or that acquires such assets or that acquires the
Company's shares, as the case may be, expressly assume all obligations under the
Indenture, the Declaration, the Guarantee and all outstanding Convertible
Debentures by becoming a party to the Declaration and the Guarantee and by
entering into a supplemental indenture to the Indenture (as applicable) and to
amend each of the foregoing to provide for such right with respect to the
Convertible Debentures and in turn the Preferred Securities. Such amendments and
supplemental indentures shall provide for adjustments that, for events
subsequent to the effective date thereof, shall be as nearly equivalent as may
be practicable to the relevant adjustments provided for in the preceding
paragraphs and in this paragraph.
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Fundamental Change (as defined below) occurs, then the
conversion price in effect will be adjusted immediately after such Fundamental
Change as follows:
(i) in the case of a Non-Stock Fundamental Change, the conversion price
of the Preferred Securities immediately following such Non-Stock Fundamental
Change shall be the lower of (A) the conversion price in effect immediately
prior to such Non-Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to the preceding paragraphs, and
(B) the product of (1) the greater of the Applicable Price (as defined
below) and the then applicable Reference Market Price (as defined below) and
(2) a fraction, the numerator of which is $50 and the denominator of which
is (x) the amount of the redemption price for one Preferred Security if the
redemption date were the date of such Non-Stock Fundamental Change (or, for
the period commencing on the first date of original issuance of the
Preferred Securities and through October 1, 1997 and the twelve-month
periods commencing October 1, 1997 and October 1, 1998, the product of
1.06750, 1.06075 and 1.05400, respectively, times $50) plus (y) any
then-accrued and unpaid distributions on one Preferred Security; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Securities immediately following such Common Stock
Fundamental Change shall be the conversion price in effect immediately prior
to such Common Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to the preceding paragraphs,
multiplied by a fraction,
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the numerator of which is the Purchaser Stock Price (as defined below) and
the denominator of which is the Applicable Price; PROVIDED, HOWEVER, that in
the event of a Common Stock Fundamental Change in which (A) 100% of the
value of the consideration received by a holder of Company Common Stock is
common stock of the successor, acquiror or other third party (and cash, if
any, paid with respect to any fractional interests in such common stock
resulting from such Common Stock Fundamental Change) and (B) all of the
Company Common Stock shall have been exchanged for, converted into or
acquired for, common stock of the successor, acquiror or other third party
(and any cash with respect to fractional interests), the conversion price of
the Preferred Securities immediately following such Common Stock Fundamental
Change shall be the conversion price in effect immediately prior to such
Common Stock Fundamental Change multiplied by a fraction, the numerator of
which is one (1) and the denominator of which is the number of shares of
common stock of the successor, acquiror or other third party received by a
holder of one share of Company Common Stock as a result of such Common Stock
Fundamental Change.
Depending upon whether a Fundamental Change is a Non-Stock Fundamental
Change or a Common Stock Fundamental Change, a holder may receive significantly
different consideration upon conversion. In the event of a Non-Stock Fundamental
Change, the holder has the right to convert Preferred Securities into the kind
and amount of the shares of stock and other securities or property or assets
(including cash), except as otherwise provided above, as is determined by the
number of shares of Company Common Stock receivable upon conversion at the
conversion price as adjusted in accordance with clause (i) of the preceding
paragraph. However, in the event of a Common Stock Fundamental Change in which
less than 100% of the value of the consideration received by a holder of Company
Common Stock is common stock of the successor, acquiror or other third party, a
holder of a Preferred Security who converts such Preferred Security following
the Common Stock Fundamental Change will receive consideration in the form of
such common stock only, whereas a holder who converted such Preferred Security
prior to the Common Stock Fundamental Change would have received consideration
in the form of such common stock as well as any other securities or assets
(which may include cash) issuable upon conversion of such Preferred Security
immediately prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of Company Common Stock receive only
cash, the amount of cash received by a holder of one share of Company Common
Stock and (ii) in the event of any other Fundamental Change, the average of the
daily Closing Price (as defined in the Indenture) for one share of Company
Common Stock during the 10 Trading Days (as defined in the Indenture)
immediately prior to the record date for the determination of the holders of
Company Common Stock entitled to receive cash, securities, property or other
assets in connection with such Fundamental Change or, if there is no such record
date, prior to the date upon which the holders of Company Common Stock shall
have the right to receive such cash, securities, property or other assets.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Company
Common Stock consists of common stock that, for the 10 Trading Days immediately
prior to such Fundamental Change, has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on Nasdaq; PROVIDED, HOWEVER, that a Fundamental Change shall not be a
Common Stock Fundamental Change unless either (i) the Company continues to exist
after the occurrence of such Fundamental Change and the outstanding Preferred
Securities continue to exist as outstanding Preferred Securities, or (ii) not
later than the occurrence of such Fundamental Change, all obligations of the
Company under the Indenture, the Declaration, the Guarantee and all outstanding
Convertible Debentures are expressly assumed by the Person succeeding to the
business of the Company by becoming a party to the Declaration and the Guarantee
and by entering into a supplemental indenture to the Indenture (as applicable),
which obligations shall include the right of the holders of the Preferred
Securities to convert the Preferred
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Securities (and the Convertible Debentures) into the common stock of such
successor entity and providing for adjustments that, for events subsequent to
the effective date thereof, shall be as nearly equivalent as may be practicable
to the relevant adjustments provided for in the preceding paragraphs and in this
paragraph.
The term "Fundamental Change" means the occurrence of any transaction or
event or series of transactions or events pursuant to which all or substantially
all of the Company Common Stock shall be exchanged for, converted into, acquired
for or shall constitute solely the right to receive cash, securities, property
or other assets (whether by means of an exchange offer, liquidation, tender
offer, consolidation, merger, combination, reclassification, recapitalization or
otherwise); PROVIDED, HOWEVER, in the case of any such series of transactions or
events, for purposes of adjustment of the conversion price, such Fundamental
Change shall be deemed to have occurred when substantially all of the Company
Common Stock shall have been exchanged for, converted into or acquired for, or
shall constitute solely the right to receive, such cash, securities, property or
other assets, but the adjustment shall be based upon the consideration that the
holders of Company Common Stock received in the transaction or event as a result
of which more than 50% of the Company Common Stock shall have been exchanged
for, converted into or acquired for, or shall constitute solely the right to
receive, such cash, securities, property or other assets.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the daily Closing Price for one share of the
common stock received by holders of Company Common Stock in such Common Stock
Fundamental Change during the 10 Trading Days immediately priorto the date fixed
for the determination of the holders of Company Common Stock entitled to receive
such common stock or, if there is no such date, prior to the date upon which the
holders of Company Common Stock shall have the right to receive such common
stock.
The term "Reference Market Price" shall initially mean $16.25 (which is an
amount equal to 66 2/3% of the reported last sale price for Company Common Stock
on the NYSE on September 26, 1996) and, in the event of any adjustment to the
conversion price other than as a result of a Fundamental Change, the Reference
Market Price shall also be adjusted so that the ratio of the Reference Market
Price to the conversion price after giving effect to any such adjustment shall
always be the same as the ratio of the initial Reference Market Price to the
initial conversion price of $28.75 per share.
No adjustment to the conversion price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the conversion price.
Conversion price adjustments or omissions in making such adjustments may,
under certain circumstances, be deemed to be distributions that could be taxable
as dividends to holders of Preferred Securities or to the holders of Company
Common Stock. See "Certain United States Federal Income Tax Considerations."
REDEMPTION
The Convertible Debentures will mature on October 1, 2016 and may be
redeemed, in whole or in part, at any time after October 5, 1999 or at any time
in certain circumstances upon the occurrence of a Tax Event (in whole, but not
in part). In the event of a redemption following the occurrence of a Tax Event,
the redemption price will, in the case of a redemption during the periods
commencing on October 2, 1996 through October 4, 1997 and the twelve month
periods commencing October 5, 1997 and October 5, 1998, be the product of
1.06750, 1.06075 and 1.05400, respectively, times $50, in each case plus accrued
and unpaid interest and Liquidated Damages, if any. Commencing with October 5,
1999, the redemption price will be the optional redemption price for the
Convertible Debentures. See "Description of the Convertible Debentures--Optional
Redemption." Upon the repayment of the Convertible Debentures, whether at
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maturity or upon redemption, the proceeds from such repayment shall
simultaneously be applied to redeem Trust Securities having an aggregate
liquidation amount equal to the Convertible Debentures so repaid or redeemed at
the applicable redemption price, together with accrued and unpaid distributions
through the date of redemption; PROVIDED, HOWEVER, that holders of the Trust
Securities shall be given not less than 30 nor more than 60 days' notice of such
redemption. See "--Special Event Redemption or Distribution," "--Redemption
Procedures," "Description of the Convertible Debentures--General" and
"Description of the Convertible Debentures--Optional Redemption."
SPECIAL EVENT REDEMPTION OR DISTRIBUTION
If, at any time, a Tax Event or an Investment Company Event shall occur and
be continuing, the Trust shall, unless the Convertible Debentures are redeemed
in the limited circumstances described below, be dissolved with the result that,
after satisfaction of creditors, if any, of the Trust, Convertible Debentures
with an aggregate principal amount equal to the aggregate stated liquidation
amount of, with an interest rate identical to the distribution rate of, and
accrued and unpaid interest equal to accrued and unpaid distributions on, and
having the same record date for payment as the Preferred Securities and the
Common Securities outstanding at such time would be distributed on a PRO RATA
basis to the holders of the Preferred Securities and the Common Securities in
liquidation of such holders' interests in the Trust, within 90 days following
the occurrence of such Special Event; PROVIDED, HOWEVER, that in the case of the
occurrence of a Tax Event, as a condition of such dissolution and distribution,
the Regular Trustees shall have received an opinion of nationally recognized
independent tax counsel experienced in such matters (a "No Recognition
Opinion"), which opinion may rely on published revenue rulings of the Internal
Revenue Service, to the effect that the holders of the Preferred Securities will
not recognize any income, gain or loss for United States Federal income tax
purposes as a result of such dissolution and distribution of Convertible
Debentures; and, PROVIDED, FURTHER, that if at the time there is available to
the Trust the opportunity to eliminate, within such 90-day period, the Special
Event by taking some ministerial action, such as filing a form or making an
election, or pursuing some other similar reasonable measure which in the sole
judgment of the Company has or will cause no adverse effect on the Trust, the
Company or the holders of the Trust Securities and will involve no material
cost, the Trust will pursue such measure in lieu of dissolution. Furthermore, if
in the case of the occurrence of a Tax Event, (i) the Regular Trustees have
received an opinion (a "Redemption Tax Opinion") of nationally recognized
independent tax counsel experienced in such matters that, as a result of a Tax
Event, there is more than an insubstantial risk that the Company would be
precluded from deducting the interest on the Convertible Debentures for United
States Federal income tax purposes even if the Convertible Debentures were
distributed to the holders of Preferred Securities and Common Securities in
liquidation of such holders' interests in the Trust as described above or (ii)
the Regular Trustees shall have been informed by such tax counsel that a No
Recognition Opinion cannot be delivered to the Trust, the Company shall have the
right, upon not less than 30 nor more than 60 days' notice, to cause the
redemption of the Convertible Debentures in whole (but not in part) for cash
within 90 days following the occurrence of such Tax Event, and promptly
following such redemption, the Preferred Securities and Common Securities will
be redeemed by the Trust at the applicable redemption price; PROVIDED, HOWEVER,
that if at the time there is available to the Company or the Trust the
opportunity to eliminate, within such 90-day period, the Tax Event by taking
some ministerial action, such as filing a form or making an election, or
pursuing some other similar reasonable measure which in the sole judgment of the
Company has or will cause no adverse effect on the Trust, the Company or the
holders of the Trust Securities and will involve no material cost, the Company
or the Trust will pursue such measure in lieu of redemption.
"Tax Event" means that the Regular Trustees shall have received an opinion
of nationally recognized independent tax counsel experienced in such matters (a
"Dissolution Tax Opinion") to the effect that as a result of (a) any amendment
to, or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, (b) any amendment to, or change in, an
interpretation or application of any such laws or
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regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination), (c) any interpretation or
pronouncement that provides for a position with respect to such laws or
regulations that differs from the theretofore generally accepted position or (d)
any action taken by any governmental agency or regulatory authority, which
amendment or change is enacted, promulgated, issued or announced or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case, after the date of this Prospectus (collectively, a "Change in Tax
Law"), there is more than an insubstantial risk that (i) the Trust is, or will
be within 90 days of the date thereof, subject to United States Federal income
tax with respect to interest accrued or received on the Convertible Debentures,
(ii) the Trust is, or will be within 90 days of the date thereof, subject to
more than a DE MINIMIS amount of other taxes, duties or other governmental
charges or (iii) interest payable by the Company on the Convertible Debentures
is not, or within 90 days of the date thereof will not be, deductible for United
States Federal income tax purposes. Notwithstanding anything in the previous
sentence to the contrary, a Tax Event shall not include any Change in Tax Law
that requires the Company for United States Federal income tax purposes to defer
taking a deduction for any original issue discount ("OID") that accrues with
respect to the Convertible Debentures until the interest payment related to such
OID is paid in money; PROVIDED, that such Change in Tax Law does not create more
than an insubstantial risk that the Company will be prevented from taking a
deduction for OID accruing with respect to the Convertible Debentures at a date
that is no later than the date the interest payment related to such OID is
actually paid by the Company in money.
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the 1940 Act),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after September 26, 1996.
On the date fixed for any distribution of Convertible Debentures, upon
dissolution of the Trust, (i) the Preferred Securities and the Common Securities
will no longer be deemed to be outstanding and (ii) certificates representing
Trust Securities will be deemed to represent beneficial interests in the
Convertible Debentures having an aggregate principal amount equal to the stated
liquidation amount of, and bearing accrued and unpaid interest equal to accrued
and unpaid distributions on, such Trust Securities until such certificates are
presented to the Company or the Company's agent for transfer or reissuance.
There can be no assurance as to the market price for the Convertible
Debentures which may be distributed in exchange for Preferred Securities if a
dissolution and liquidation of the Trust were to occur. Accordingly, the
Convertible Debentures which the investor may subsequently receive on
dissolution and liquidation of the Trust may trade at a discount to the price of
the Preferred Securities exchanged.
REDEMPTION PROCEDURES
The Trust may not redeem fewer than all of the outstanding Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Preferred Securities for all quarterly distribution periods terminating on or
prior to the date of redemption.
In the event of any redemption in part, the Trust shall not be required to
(i) issue, register the transfer of or exchange any Preferred Security during a
period beginning at the opening of business 15 days before any selection for
redemption of Preferred Securities and ending at the close of business on the
earliest date on which the relevant notice of redemption is deemed to have been
given to all holders of Preferred Securities to be so redeemed and (ii) register
the transfer of or exchange of any Preferred Securities so
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selected for redemption, in whole or in part, except for the unredeemed portion
of any Preferred Securities being redeemed in part.
If the Trust gives a notice of redemption in respect of Preferred Securities
(which notice will be irrevocable), and if the Company has paid to the Property
Trustee a sufficient amount of cash in connection with the related redemption or
maturity of the Convertible Debentures, then, by 12:00 noon, New York time, on
the redemption date, the Trust will irrevocably deposit with DTC funds
sufficient to pay the amount payable on redemption of all book-entry
certificates and will give DTC irrevocable instructions and authority to pay
such amount in respect of Preferred Securities represented by the Global
Certificates (as defined herein) and will irrevocably deposit with the paying
agent for the Preferred Securities funds sufficient to pay such amount in
respect of any Certificated Securities and will give such paying agent
irrevocable instructions and authority to pay such amount to the holders of
Certificated Securities upon surrender of their certificates. If notice of
redemption shall have been given and funds are deposited as required, then upon
the date of such deposit, all rights of holders of such Preferred Securities so
called for redemption will cease, except the right of the holders of such
Preferred Securities to receive the applicable redemption price, but without
interest on such Redemption Price. In the event that any date fixed for
redemption of Preferred Securities is not a Business Day, then payment of the
amount payable on such date will be made on the next succeeding day which is a
Business Day (without any interest or other payment in respect of any such
delay), except that, if such Business Day falls in the next calendar year, such
payment will be made on the immediately preceding Business Day. In the event
that payment of the applicable redemption price in respect of Preferred
Securities is improperly withheld or refused and not paid either by the Trust or
by the Company pursuant to the Guarantee described under "Description of the
Guarantee," distributions on such Preferred Securities will continue to accrue
at the then applicable rate, from the original redemption date to the date of
payment, in which case the actual payment date will be considered the date fixed
for redemption for purposes of calculating the amount payable upon redemption
(other than for calculating any premium).
In the event that fewer than all of the outstanding Preferred Securities are
to be redeemed, the Preferred Securities will be redeemed PRO RATA.
Subject to the foregoing and applicable law (including, without limitation,
United States Federal securities laws), the Company or its subsidiaries may at
any time and from time to time purchase outstanding Preferred Securities by
tender, in the open market or by private agreement.
SUBORDINATION OF COMMON SECURITIES
Payment of distributions on, and the amount payable upon redemption of, the
Trust Securities, as applicable, shall be made PRO RATA based on the liquidation
amount of the Trust Securities; PROVIDED, HOWEVER, that if on any distribution
date or redemption date a Declaration Event of Default shall have occurred and
be continuing, no payment of any distribution on, or amount payable upon
redemption of, any Common Security, and no other payment on account of the
redemption, liquidation or other acquisition of Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all outstanding Preferred Securities for all distribution periods terminating on
or prior thereto, or in the case of payment of the amount payable upon
redemption of the Preferred Securities, the full amount of such amount in
respect of all outstanding Preferred Securities, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all distributions on, or the amount
payable upon redemption of, Preferred Securities then due and payable.
In the case of any Declaration Event of Default, the holder of Common
Securities will be deemed to have waived any such Declaration Event of Default
until all such Declaration Events of Default with respect to the Preferred
Securities have been cured, waived or otherwise eliminated. Until any such
Declaration Events of Default with respect to the Preferred Securities have been
so cured, waived or
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otherwise eliminated, the Property Trustee shall act solely on behalf of the
holders of the Preferred Securities and not the holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
In the event of any voluntary or involuntary liquidation, dissolution,
winding-up or termination of the Trust (each a "Liquidation"), the then holders
of the Preferred Securities will be entitled to receive out of the assets of the
Trust, after satisfaction of liabilities to creditors, distributions in an
amount equal to the aggregate of the stated liquidation amount of $50 per
Preferred Security plus accrued and unpaid distributions thereon to the date of
payment (the "Liquidation Distribution"), unless, in connection with such
Liquidation, Convertible Debentures in an aggregate stated principal amount
equal to the aggregate stated liquidation amount of, with an interest rate
identical to the distribution rate of, and accrued and unpaid interest equal to
accrued and unpaid distributions on, the Preferred Securities shall have been
distributed on a PRO RATA basis to holders of the Preferred Securities.
If, upon any such Liquidation, the Liquidation Distribution can be paid only
in part because the Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Preferred Securities shall be paid on a PRO RATA basis. The holders
of the Common Securities will be entitled to receive distributions upon any such
dissolution PRO RATA with the holders of the Preferred Securities, except that
if a Declaration Event of Default has occurred and is continuing, the Preferred
Securities shall have a preference over the Common Securities with regard to
such distributions.
Pursuant to the Declaration, the Trust will terminate (i) on October 1,
2025, the expiration of the term of the Trust, (ii) upon the bankruptcy of the
Company, (iii) upon the filing of a certificate of dissolution or the equivalent
with respect to the Company the filing of a certificate of cancellation with
respect to the Trust after having obtained the consent of at least a majority in
liquidation amount of the Trust Securities, voting together as a single class,
to file such certificate of cancellation, or the revocation of the charter of
the Company and the expiration of 90 days after the date of revocation without a
reinstatement thereof, (iv) upon the distribution of all of the Convertible
Debentures upon the occurrence of a Special Event, (v) upon the entry of a
decree of a judicial dissolution of the Company or the Trust or (vi) upon the
redemption or conversion of all the Preferred Securities.
MERGER, CONSOLIDATION OR AMALGAMATION OF THE TRUST
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety, to any corporation or other entity, except as
described below. The Trust may, with the consent of a majority of the Regular
Trustees and without the consent of the holders of the Trust Securities, the
Property Trustee or the Delaware Trustee, consolidate, amalgamate, merge with or
into, or be replaced by a trust organized as such under the laws of any State of
the United States; PROVIDED, that (i) if the Trust is not the survivor, such
successor entity either (x) expressly assumes all of the obligations of the
Trust under the Trust Securities or (y) substitutes for the Preferred Securities
other securities having substantially the same terms as the Securities (the
"Successor Securities"), so long as the Successor Securities rank the same as
the Securities rank with respect to distributions, assets and payments, (ii) the
Company expressly acknowledges a trustee of such successor entity possessing the
same powers and duties as the Property Trustee as the holder of the Convertible
Debentures, (iii) the Preferred Securities or any Successor Securities are
listed, or any Successor Securities will be listed upon notification of
issuance, on any national securities exchange or with another organization on
which the Preferred Securities are then listed or quoted, (iv) such merger,
consolidation, amalgamation or replacement does not cause the Preferred
Securities (including any Successor Securities) to be downgraded by any
nationally recognized statistical rating organization, (v) such merger,
consolidation, amalgamation or replacement does not adversely affect the rights,
preferences and privileges of the holders of the Preferred
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Securities (including any Successor Securities) in any material respect (other
than with respect to any dilution of the holders' interest in the new entity),
(vi) such successor entity has a purpose substantially identical to that of the
Trust, (vii) the Company guarantees the obligations of such successor entity
under the Successor Securities to the same extent as provided by the Guarantee
and (viii) prior to such merger, consolidation, amalgamation or replacement, the
Company has received an opinion of a nationally recognized independent counsel
to the Trust reasonably acceptable to the Property Trustee experienced in such
matters to the effect that: (A) such merger, consolidation, amalgamation or
replacement will not adversely affect the rights, preferences and privileges of
the holders of the Trust Securities (including any Successor Securities) in any
material respect (other than with respect to any dilution of the holders'
interest in the new entity), (B) following such merger, consolidation
amalgamation or replacement, neither the Trust nor such successor entity will be
required to register as an investment company under the 1940 Act and (C)
following such merger, consolidation, amalgamation or replacement, the Trust (or
such successor trust) will be treated as a grantor trust for United States
Federal income tax purposes.
Notwithstanding the foregoing, the Trust shall not, except with the consent
of holders of 100% in liquidation amount of the Common Securities, consolidate,
amalgamate, merge with or into, or be replaced by any other entity or permit any
other entity to consolidate, amalgamate, merge with or into, or replace it, if
such consolidation, amalgamation, merger or replacement would cause the Trust or
the successor entity to be classified as other than a grantor trust for United
States Federal income tax purposes.
DECLARATION EVENTS OF DEFAULT
An event of default under the Indenture (an "Indenture Event of Default")
constitutes an event of default under the Declaration with respect to the Trust
Securities (a "Declaration Event of Default"); PROVIDED, HOWEVER, that pursuant
to the Declaration, the holder of the Common Securities will be deemed to have
waived any Declaration Event of Default with respect to the Common Securities
until all Declaration Events of Default with respect to the Preferred Securities
have been cured, waived or otherwise eliminated. Until such Declaration Events
of Default with respect to the Preferred Securities have been so cured, waived
or otherwise eliminated, the Property Trustee will be deemed to be acting solely
on behalf of the holders of the Preferred Securities and only the holders of the
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and, therefore the Indenture.
If the Property Trustee fails to enforce its rights under the Convertible
Debentures after a holder of Preferred Securities has made a written request,
such holder of record of Preferred Securities may directly institute a legal
proceeding against the Company to enforce the Property Trustee's rights under
the Convertible Debentures without first instituting any legal proceeding
against the Property Trustee or any other person or entity. Notwithstanding the
foregoing, if a Declaration Event of Default has occurred and is continuing and
such event is attributable to the failure of the Company to pay interest or
principal on the Convertible Debentures on the date such interest or principal
is otherwise payable (or in the case of redemption, the redemption date), then a
holder of Preferred Securities may directly institute a proceeding for
enforcement of payment to such holder directly of the principal of or interest
on the Convertible Debentures having a principal amount equal to the aggregate
liquidation amount of the Preferred Securities of such holder on or after the
respective due date specified in the Convertible Debentures. In connection with
such Direct Action, the Company will be subrogated to the rights of such holder
of Preferred Securities under the Declaration to the extent of any payment made
to such holder of Preferred Securities in such Direct Action. The holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Convertible Debentures.
Upon the occurrence of a Declaration Event of Default, the Property Trustee
as the sole holder of the Convertible Debentures will have the right under the
Indenture to declare the principal of and interest on the Convertible Debentures
to be immediately due and payable. The Company and the Trust are each
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required to file annually with the Property Trustee an officers' certificate as
to its compliance with all conditions and covenants under the Declaration.
VOTING RIGHTS
Except as described herein, under the Trust Act, the Trust Indenture Act and
under "Description of the Guarantee--Amendments and Assignment," and as
otherwise required by law and the Declaration, the holders of the Preferred
Securities will have no voting rights.
Subject to the requirement of the Property Trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of a majority in liquidation amount of the Preferred Securities have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or direct the exercise of any trust or
power conferred upon the Property Trustee under the Declaration, including the
right to direct the Property Trustee, as holder of the Convertible Debentures,
to (i) exercise the remedies available to it under the Indenture as a holder of
the Convertible Debentures, (ii) waive any past Indenture Event of Default that
is waivable under the Indenture, (iii) exercise any right to rescind or annul a
declaration that the principal of all the Convertible Debentures shall be due
and payable or (iv) consent to any amendment, modification, or termination of
the Indenture or the Convertible Debentures where such consent shall be
required; PROVIDED, HOWEVER, that where a consent or action under the Indenture
would require the consent or act of the holders of more than a majority of the
aggregate principal amount of Convertible Debentures affected thereby, only the
holders of the percentage of the aggregate stated liquidation amount of the
Preferred Securities which is at least equal to the percentage required under
the Indenture may direct the Property Trustee to give such consent or take such
action. If the Property Trustee fails to enforce its rights under the
Convertible Debentures after a holder of record of Preferred Securities has made
a written request, such holder of record of Preferred Securities may directly
institute a legal proceeding directly against the Company to enforce the
Property Trustee's rights under the Convertible Debentures without first
instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise payable (or in
the case of redemption on the redemption date), then a holder of Preferred
Securities may directly institute a proceeding for enforcement of payment to
such holder of the principal of or interest on the Convertible Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder on or after the respective due date specified in the
Convertible Debentures. The Property Trustee shall notify all holders of the
Preferred Securities of any notice of default received from the Indenture
Trustee with respect to the Convertible Debentures. Such notice shall state that
such Indenture Event of Default also constitutes a Declaration Event of Default.
The Property Trustee shall be under no obligation to take any of the actions
described in clause (i), (ii) or (iii) above unless the Property Trustee has
obtained an opinion of independent tax counsel to the effect that as a result of
such action, the Trust will not fail to be classified as a grantor trust for
United States Federal income tax purposes and each holder will be treated as
owning an undivided beneficial interest in the Convertible Debentures.
In the event the consent of the Property Trustee, as the holder of the
Convertible Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture, the Property Trustee
shall request the direction of the holders of the Trust Securities with respect
to such amendment, modification or termination and shall vote with respect to
such amendment, modification or termination as directed by a majority in
liquidation amount of the Trust Securities voting together as a single class;
PROVIDED, HOWEVER, that where a consent under the Indenture would require the
consent of the holders of more than a majority of the aggregate principal amount
of the Convertible Debentures, the Property Trustee may only give such consent
at the direction of the holders of at least the same proportion in aggregate
stated liquidation amount of the Trust Securities. The Property Trustee shall
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not take any such action in accordance with the directions of the holders of the
Trust Securities unless the Property Trustee has obtained an opinion of tax
counsel to the effect that for the purposes of United States Federal income tax
the Trust will not be classified as other than a grantor trust.
A waiver of an Indenture Event of Default will constitute a waiver of the
corresponding Declaration Event of Default.
Any required approval or direction of holders of Preferred Securities may be
given at a separate meeting of holders of Preferred Securities convened for such
purpose, at a meeting of all of the holders of Trust Securities or pursuant to
written consent. The Regular Trustees will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
upon which action by written consent of such holders is to be taken, to be
mailed to each holder of record of Preferred Securities. Each such notice will
include a statement setting forth the following information: (i) the date of
such meeting or the date by which such action is to be taken; (ii) a description
of any resolution proposed for adoption at such meeting on which such holders
are entitled to vote or of such matter upon which written consent is sought; and
(iii) instructions for the delivery of proxies or consents. No vote or consent
of the holders of Preferred Securities will be required for the Trust to redeem
and cancel Preferred Securities or distribute Convertible Debentures in
accordance with the Declaration.
Notwithstanding that holders of Preferred Securities are entitled to vote or
consent under any of the circumstances described above, any of the Preferred
Securities that are owned at such time by the Company or any entity directly or
indirectly controlling or controlled by, or under direct or indirect common
control with, the Company, shall not be entitled to vote or consent and shall,
for purposes of such vote or consent, be treated as if such Preferred Securities
were not outstanding.
The procedures by which holders of Preferred Securities represented by the
Global Certificates may exercise their voting rights are described below. See
"--Book-Entry Only Issuance--The Depository Trust Company."
Holders of the Preferred Securities have no rights to appoint or remove the
Regular Trustees, who may be appointed, removed or replaced solely by the
Company as the holder of all of the Common Securities.
MODIFICATION OF THE DECLARATION
The Declaration may be modified and amended if approved by the Regular
Trustees (and in certain circumstances the Property Trustee and the Delaware
Trustee), PROVIDED that if any proposed amendment provides for, or the Regular
Trustees otherwise propose to effect, (i) any action that would adversely affect
the powers, preferences or special rights of the Trust Securities, whether by
way of amendment to the Declaration or otherwise, or (ii) the dissolution,
winding-up or termination of the Trust other than pursuant to the terms of the
Declaration, then the holders of the Trust Securities voting together as a
single class will be entitled to vote on such amendment or proposal and such
amendment or proposal shall not be effective except with the approval of at
least a majority in liquidation amount of the Trust Securities affected thereby;
PROVIDED that if any amendment or proposal referred to in clause (i) above would
adversely affect only the Preferred Securities or the Common Securities, then
only the affected class will be entitled to vote on such amendment or proposal
and such amendment or proposal shall not be effective except with the approval
of at least a majority in liquidation amount of such class of securities.
Notwithstanding the foregoing, no amendment or modification may be made to
the Declaration if such amendment or modification would (i) cause the Trust to
be classified for purposes of United States Federal income taxation as other
than a grantor trust, (ii) reduce or otherwise adversely affect the powers of
the Property Trustee or (iii) cause the Trust to be deemed an "investment
company" which is required to be registered under the 1940 Act.
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REGISTRATION RIGHTS
In connection with the Original Offering, the Company and the Trust entered
into a registration rights agreement with the Initial Purchasers (the
"Registration Rights Agreement") pursuant to which the Company and the Trust
would, at the Company's expense, for the benefit of the holders of the Preferred
Securities, the Guarantee, the Convertible Debentures and the shares of Company
Common Stock issuable upon conversion of the Convertible Debentures (together,
the "Registrable Securities"), (i) file with the Commission within 75 calendar
days after the date of issuance of the Preferred Securities (December 16, 1996),
a registration statement (the "Shelf Registration Statement") covering resales
of the Registrable Securities, (ii) use their reasonable efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
within 135 calendar days after the date of the issuance of the Preferred
Securities (February 14, 1997) and (iii) use their reasonable efforts to keep
effective the Shelf Registration Statement until three years after the date it
is declared effective or such earlier date as all Registrable Securities shall
have been disposed of or on which all Registrable Securities held by persons
that are not affiliates of the Company or the Trust may be resold without
registration pursuant to Rule 144(k) under the Securities Act (the
"Effectiveness Period"). The Registration Statement to which this Prospectus
forms a part has been filed by the Company and the Trust pursuant to their
respective obligations under the Registration Rights Agreement. The Company will
provide to each holder of Registrable Securities copies of this Prospectus,
notify each holder when the Shelf Registration Statement has become effective
and take certain other actions as are required to permit unrestricted resales of
the Registrable Securities. A holder of Registrable Securities that sells such
Registrable Securities pursuant to the Shelf Registration Statement will be
required to be named as a selling security holder herein and, to the extent
required by the Act, to deliver a copy of this Prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement, including certain indemnification obligations.
If (i) the Shelf Registration Statement to which this Prospectus forms a
part was not filed with the Commission on or prior to December 16, 1996 or (ii)
such Shelf Registration Statement was not declared effective on or prior to
February 14, 1997 (each, a "Registration Default"), additional interest
("Liquidated Damages") would have accrued on the Convertible Debentures and,
accordingly, additional distributions would have accrued on the Preferred
Securities, in each case from and including the day following such Registration
Default.
The Company will be permitted under certain circumstances (whether or not
controlled by, or within the control of, the Company) to suspend the use of this
Prospectus which is part of the Shelf Registration Statement for a period not to
exceed 30 consecutive days or 90 days, whether or not consecutive, during any
12-month period. In the event that the Shelf Registration Statement ceases to be
effective during the Effectiveness Period for more than 30 consecutive days or
any 90 days, whether or not consecutive, during any 12-month period, then the
interest rate borne by the Debentures and the distribution rate borne by the
Preferred Securities would each increase by an additional one-half of one
percent (0.50%) per annum from such 31st or 91st day, as applicable.
The Company and the Trust agreed in the Registration Rights Agreement to use
their reasonable efforts to cause the Preferred Securities and the Company
Common Stock issuable upon conversion of the Debentures to be listed on the NYSE
upon effectiveness of the Shelf Registration Statement. However, due to the fact
that the Trust will be unable to meet all of the listing requirements of the
NYSE for the Preferred Securities sold pursuant to this Prospectus prior to the
time of original effectiveness of the Shelf Registration Statement, the Company
and the Trust will not immediately seek to list such Preferred Securities on the
NYSE or any other securities exchange or to obtain approval for quotation
through any automated quotation system. The Company and the Trust intend to
reevaluate listing the Preferred Securities on the NYSE if and to the extent the
listing and maintenance requirements of the exchange applicable thereto are met
in the future.
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The summary herein of certain provisions of the Registration Rights
Agreement is subject to, and is qualified in its entirety by reference to, all
the provisions of the Registration Rights Agreement, a copy of which is
available upon request to the Company or the Initial Purchasers.
BOOK-ENTRY ONLY ISSUANCE--THE DEPOSITORY TRUST COMPANY
The description of book-entry procedures in this Prospectus includes
summaries of certain rules and operating procedures of The Depository Trust
Company, New York, New York ("DTC") that affect transfers of interest in the
global certificate or certificates issued in connection with sales of Preferred
Securities made pursuant to this Prospectus. Except to the extent that Preferred
Securities were initially sold in the Original Offering or the Over-Allotment
Offering to institutional "accredited investors" (as defined in Rule 501(a)(1),
(2), (3) or (7) under the Securities Act) or in offshore transactions pursuant
to Regulation S under the Securities Act, the Preferred Securities were issued
only as fully registered securities registered in the name of Cede & Co. (as
nominee for DTC). One or more fully registered global Preferred Security
certificates (the "Global Certificates") bearing a CUSIP number distinct from
the CUSIP number for the Preferred Securities issued in the Original Offering
and the Over-Allotment Offering will be issued, representing, in the aggregate,
Preferred Securities sold pursuant to this Prospectus, and will be deposited
with DTC. In the event of a transfer of securities that were issued in fully
registered, certificated form, the holder of such certificates will be required
to exchange them for interests in the Global Certificates representing the
number of Preferred Securities being transferred.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Participants in DTC
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Commission.
Purchases of Preferred Securities within the DTC system must be made by or
through Participants, which will receive a credit for the Preferred Securities
on DTC's records. The ownership interest of each actual purchaser of Preferred
Securities ("Beneficial Owner") is in turn to be recorded on the Participants'
and Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Participants or Indirect
Participants through which the Beneficial Owners purchased Preferred Securities.
Transfers of ownership interests in the Preferred Securities are to be
accomplished by entries made on the books of Participants and Indirect
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in Preferred
Securities, except in the event that use of the book-entry system for the
Preferred Securities is discontinued.
DTC has no knowledge of the actual Beneficial Owners of the Preferred
Securities; DTC's records reflect only the identity of the Participants to whose
accounts such Preferred Securities are credited, which may or may not be the
Beneficial Owners. The Participants and Indirect Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
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So long as DTC, or its nominee, is the registered owner or holder of a
Global Certificate, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the Preferred Securities represented thereby for all
purposes under the Declaration and the Preferred Securities. No beneficial owner
of an interest in a Global Certificate will be able to transfer that interest
except in accordance with DTC's applicable procedures, in addition to those
provided for under the Declaration.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Preferred Securities (including the presentation of
Preferred Securities for exchange as described below) only at the direction of
one or more Participants to whose account the DTC interests in the Global
Certificates are credited and only in respect of such portion of the aggregate
liquidation amount of Preferred Securities as to which such Participant or
Participants has or have given such direction. However, if there is a
Declaration Event of Default under the Preferred Securities, DTC will exchange
the Global Certificates for Certificated Securities, which it will distribute to
its Participants.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Redemption notices in respect of the Preferred Securities held in book-entry
form will be sent to DTC or its nominee. If less than all of the Preferred
Securities are being redeemed, DTC will determine the amount of the interest of
each Participant to be redeemed in accordance with its procedures.
Although voting with respect to the Preferred Securities is limited, in
those cases where a vote is required, neither DTC nor its nominee will itself
consent or vote with respect to Preferred Securities. Under its usual
procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible
after the record date. The Omnibus Proxy assigns DTC's consenting or voting
rights to those Participants to whose accounts the Preferred Securities are
credited on the record date (identified in a listing attached to the Omnibus
Proxy).
Distributions on the Preferred Securities held in book-entry form will be
made to DTC in immediately available funds. DTC's practice is to credit
Participants' accounts on the relevant payment date in accordance with their
respective holdings shown on DTC's records unless DTC has reason to believe that
it will not receive payments on such payment date. Payments by Participants and
Indirect Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participants and Indirect Participants and not of DTC, the Trust, or the Company
subject to any statutory or regulatory requirements as may be in effect from
time to time. Payment of distributions to DTC is the responsibility of the
Trust, disbursement of such payments to Participants is the responsibility of
DTC, and disbursement of such payments to the Beneficial Owners is the
responsibility of Participants and Indirect Participants.
Except as provided herein, a Beneficial Owner of an interest in a Global
Certificate will not be entitled to receive physical delivery of Preferred
Securities. Accordingly, each Beneficial Owner must rely on the procedures of
DTC to exercise any rights under the Preferred Securities.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Certificates among Participants of DTC, DTC
is under no obligation to perform or continue to perform such procedures, and
such procedures may be discontinued at any time. None of the Company, the Trust
or the Trustee will have any responsibility for the performance by DTC or its
Participants or Indirect Participants under the rules and procedures governing
DTC. DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving notice to the Trust.
Under such circumstances, in the event that a successor securities depository is
not obtained, Preferred Security certificates are required to be printed and
delivered. Additionally, the Trust (with the consent of the Company) may decide
to discontinue use of the system of book-entry transfers through
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DTC (or a successor depository). In that event, certificates for the Preferred
Securities will be printed and delivered. In each of the above circumstances,
the Company will appoint a paying agent with respect to the Preferred
Securities.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of securities in definitive form. Such laws may impair
the ability to transfer beneficial interests in the global Preferred Securities
as represented by a Global Certificate.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities represented by the Global
Certificates shall be made to DTC, which shall credit the relevant accounts at
DTC on the applicable distribution dates or, in the case of certificated
securities, such payments shall be made by check mailed to the address of the
holder entitled thereto as such address as shall appear on the Register. The
Paying Agent is currently Wilmington Trust Company. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Issuer
Trustees. In the event that Wilmington Trust Company shall no longer be the
Paying Agent, the Trustee shall appoint a successor to act as Paying Agent
(which shall be a bank or company).
REGISTRAR, TRANSFER AGENT, PAYING AGENT AND CONVERSION AGENT
The Property Trustee acts as Registrar, Transfer Agent, Paying Agent and
Conversion Agent for the Preferred Securities.
Registration of transfers of Preferred Securities will be effected without
charge by or on behalf of the Trust but upon payment (with the giving of such
indemnity as the Trust or the Company may require) in respect of any tax or
other government charges which may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Preferred Securities after such Preferred Securities have been
called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Company and certain of its subsidiaries may maintain deposit accounts
and conduct other banking transactions with the Property Trustee in the ordinary
course of their businesses. The Property Trustee, prior to the occurrence of a
default with respect to the Trust Securities, has undertaken to perform only
such duties as are specifically set forth in the Declaration and, after default,
shall exercise the same degree of care as a prudent individual would exercise in
the conduct of his or her own affairs. Subject to such provisions, the Property
Trustee is under no obligation to exercise any of the powers vested in it by the
Declaration at the request of any holder of Preferred Securities, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The holders of Preferred Securities will not be
required to offer such indemnity in the event such holders, by exercising their
voting rights, direct the Property Trustee to take any action following a
Declaration Event of Default.
GOVERNING LAW
The Declaration and the Preferred Securities are governed by, and shall be
construed in accordance with, the internal laws of the State of Delaware.
MISCELLANEOUS
The Regular Trustees are authorized and directed to conduct the affairs of
and to operate the Trust in such a way that the Trust will not be deemed to be
an "investment company" required to be registered under the 1940 Act or
characterized as other than a grantor trust for United States Federal income tax
purposes so that the Convertible Debentures will be treated as indebtedness of
the Company for United States Federal income tax purposes. In this connection,
the Regular Trustees are authorized to take any
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action, not inconsistent with applicable law, the certificate of trust or the
Declaration that the Regular Trustees determine in their discretion to be
necessary or desirable for such purposes as long as such action does not
adversely affect the interests of the holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive rights.
DESCRIPTION OF THE GUARANTEE
Set forth below is a summary of information concerning the Guarantee which
was executed and delivered by the Company for the benefit of the holders from
time to time of Preferred Securities. The summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the Guarantee. The Guarantee incorporates by
reference the terms of the Trust Indenture Act. The Guarantee was qualified
under the Trust Indenture Act upon effectiveness of the Registration Statement
of which this Prospectus forms a part. The Guarantee Trustee holds the Guarantee
for the benefit of the holders of the Preferred Securities.
GENERAL
Pursuant to and to the extent set forth in the Guarantee, the Company has
irrevocably and unconditionally agreed to pay in full to the holders of the
Preferred Securities (except to the extent paid by the Trust), as and when due,
regardless of any defense, right of set off or counterclaim which the Trust may
have or assert, the following payments (the "Guarantee Payments"), without
duplication: (i) any accrued and unpaid distributions that are required to be
paid on the Preferred Securities to the extent the Trust has funds available
therefor, (ii) the applicable redemption price with respect to any Preferred
Securities called for redemption by the Trust, to the extent the Trust has funds
available therefor, and (iii) upon a voluntary or involuntary dissolution,
winding-up or termination of the Trust (other than in connection with the
distribution of Convertible Debentures to the holders of Preferred Securities or
the redemption of all the Preferred Securities), the lesser of (a) the aggregate
of the liquidation amount and all accrued and unpaid distributions on the
Preferred Securities to the date of payment, to the extent the Trust has funds
available therefor, and (b) the amount of assets of the Trust remaining
available for distribution to holders of Preferred Securities upon the
liquidation of the Trust. The holders of a majority in liquidation amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee or
to direct the exercise of any trust or power conferred upon the Guarantee
Trustee under the Guarantee. Any holder of Preferred Securities may directly
institute a legal proceeding against the Company to enforce the obligations of
the Company under the Guarantee without first instituting a legal proceeding
against the Trust, the Guarantee Trustee or any other person or entity. If the
Company were to default on its obligation to pay amounts payable on the
Convertible Debentures, the Trust would lack available funds for the payment of
distributions or amounts payable on redemption of the Preferred Securities or
otherwise, and in such event holders of the Preferred Securities would not be
able to rely upon the Guarantee for payment of such amounts. Instead, a holder
of the Preferred Securities would be required to rely on the enforcement (1) by
the Property Trustee of its rights, as registered holder of the Convertible
Debentures, against the Company pursuant to the terms of the Convertible
Debentures or (2) by such holder of Preferred Securities of its right against
the Company to enforce payments on the Convertible Debentures. See "Description
of the Convertible Debentures." The Declaration provides that each holder of
Preferred Securities, by acceptance thereof, agrees to the provisions of the
Guarantee and the Indenture.
The Guarantee does not apply to any payment of distributions or the
Redemption Price, or to payments upon the dissolution, winding-up or termination
of the Trust, except to the extent the Trust shall have funds available
therefor. If the Company does not make interest payments on the Convertible
Debentures, the Trust will not pay distributions on the Preferred Securities and
will not have funds available therefor. See "Description of the Convertible
Debentures." The Guarantee, when taken together with the Company's obligations
under the Convertible Debentures, the Indenture and the Declaration,
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including its obligations to pay costs, expenses, debts and liabilities of the
Trust (other than with respect to the Trust Securities), provides a full and
unconditional guarantee by the Company of payments due on the Preferred
Securities issued by the Trust.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of the Trust with respect to the Common Securities
(the "Common Securities Guarantee") to the same extent as the Guarantee, except
that upon the occurrence and during the continuation of a Declaration Event of
Default, holders of Preferred Securities shall have priority over holders of
Common Securities with respect to distributions and payments on liquidation,
redemption or otherwise.
CERTAIN COVENANTS OF THE COMPANY
In the Guarantee, the Company has covenanted that, so long as any Preferred
Securities remain outstanding, if (i) the Company has exercised its option to
defer interest payments on the Convertible Debentures by extending the interest
payment period and such extension shall be continuing, (ii) the Company shall be
in default with respect to its payment or other obligations under the Guarantee
or (iii) there shall have occurred and be continuing any event that, with the
giving of notice or the lapse of time or both, would constitute an Indenture
Event of Default, then the Company (a) shall not, and shall not allow any of its
subsidiaries (other than its wholly owned subsidiaries) to, declare or pay
dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital stock
(except for (i) dividends or distributions in shares of Company Common Stock on
Company Common Stock or on its Preferred Stock, (ii) purchases or acquisitions
of shares of Company Common Stock made in connection with employee benefit plans
of the Company or its subsidiaries in the ordinary course of business or
pursuant to employment agreements with officers or employees of the Company or
its subsidiaries entered into in the ordinary course of business, provided that
repurchases by the Company or its subsidiaries made from officers or employees
of the Company or its subsidiaries pursuant to employment agreements shall be
made at a price not to exceed market value on the date of any such repurchase
and shall not exceed $1 million in the aggregate for all such employees and
officers, (iii) conversions or exchanges of any class of common stock into any
other class of common stock or (iv) purchases of fractional interests in shares
of the Company's capital stock pursuant to the conversion or exchange provisions
of any of the Company's securities being converted or exchanged), (b) shall not,
and shall not allow any of its subsidiaries to, make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem any debt
securities of the Company that rank junior to or PARI PASSU with the Convertible
Debentures and (c) shall not, and shall not allow any of its subsidiaries to,
make any guarantee payments with respect to the foregoing (other than such
payments made pursuant to the Guarantee).
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes that do not materially adversely affect
the rights of holders of Preferred Securities (in which case no vote will be
required), the Guarantee may be amended only with the prior approval of the
holders of at least a majority in liquidation amount of all the outstanding
Preferred Securities. The manner of obtaining any such approval of holders of
the Preferred Securities will be as set forth under "Description of the
Preferred Securities--Voting Rights." All guarantees and agreements contained in
the Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Company and shall inure to the benefit of the holders of
the Preferred Securities then outstanding. Except in connection with any
permitted merger or consolidation of the Company with or into another entity or
any permitted sale, transfer or lease of the Company's assets to another entity
as described below under "Description of the Convertible
Debentures--Consolidation, Merger and Sale of Assets," the Company may not
assign its rights or delegate its obligations under the Guarantee without the
prior approval of the holders of at least a majority of the aggregate stated
liquidation amount of the Preferred Securities then outstanding.
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TERMINATION OF THE GUARANTEE
The Guarantee will terminate as to each holder of Preferred Securities (i)
upon full payment of the applicable redemption price of all Preferred
Securities, (ii) upon distribution of the Convertible Debentures held by the
Trust to the holders of the Preferred Securities, (iii) upon liquidation of the
Trust and full payment of fee amounts payable in accordance with the Declaration
or (iv) upon the distribution of Company Common Stock to such holder in respect
of the conversion of such holder's Preferred Securities into Company Common
Stock, and will terminate completely upon full payment of the amounts payable in
accordance with the Declaration. The Guarantee will continue to be effective or
will be reinstated, as the case may be, if at any time any holder of Preferred
Securities must restore payment of any sum paid under such Preferred Securities
or such Guarantee.
STATUS OF THE GUARANTEE; SUBORDINATION
The Guarantee constitutes an unsecured obligation of the Company and ranks
(i) subordinate and junior to all other liabilities of the Company except any
liabilities that may be PARI PASSU expressly by their terms, (ii) PARI PASSU in
right of payment with the most senior preferred stock issued from time to time
by the Company and with any guarantee now or hereafter entered into by the
Company in respect of any preferred or preference stock or preferred securities
of any affiliate of the Company and (iii) senior to the common stock of the
Company. The terms of the Preferred Securities provide that each holder of
Preferred Securities by acceptance thereof agrees to the subordination
provisions and other terms of the Guarantee.
The Guarantee constitutes a guarantee of payment and not of collection (that
is, the guaranteed party may directly institute a legal proceeding against the
Company to enforce its rights under the Guarantee without instituting a legal
proceeding against any other person or entity including the Trust).
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, prior to the occurrence of a default with respect to
the Guarantee, has undertaken to perform only such duties as are specifically
set forth in the Guarantee and, after default with respect to the Guarantee,
shall exercise the same degree of care as a prudent man would exercise in the
conduct of his own affairs. Subject to such provision, the Guarantee Trustee is
under no obligation to exercise any of the powers vested in it by the Guarantee
at the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
GOVERNING LAW
The Guarantee is governed by, and shall be construed in accordance with, the
laws of the State of New York.
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DESCRIPTION OF THE CONVERTIBLE DEBENTURES
Set forth below is a description of the specific terms of the Convertible
Debentures in which the Trust has invested the proceeds from the issuance and
sale of the Trust Securities. The following description does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Indenture (the "Indenture") among the Company and the Indenture Trustee, a
copy of which may be obtained from the Company upon request. Certain capitalized
terms used herein are defined in the Indenture. The Indenture was qualified
under the Trust Indenture Act upon effectiveness of the Registration Statement
of which this Prospectus forms a part.
Under certain circumstances involving the dissolution of the Trust following
the occurrence of a Special Event, Convertible Debentures may be distributed to
the holders of the Trust Securities in liquidation of the Trust. See
"Description of the Preferred Securities--Special Event Redemption or
Distribution."
GENERAL
The Convertible Debentures have been issued as unsecured debt under the
Indenture. The Convertible Debentures were limited in aggregate principal amount
to $207.5 million, such amount being the sum of the aggregate stated liquidation
amount of the Preferred Securities and the Common Securities.
The Convertible Debentures are not subject to a sinking fund provision. The
entire principal amount of the Convertible Debentures will become due and
payable, together with any accrued and unpaid interest thereon, including
Compounded Interest (as defined herein) and Additional Interest, if any, on
October 1, 2016.
The Convertible Debentures, if distributed to holders of Preferred
Securities in liquidation of such holders' interest in the Trust, will initially
be issued in the same form as the Preferred Securities that such Convertible
Debentures replace. Any Global Certificate will be replaced with one or more
Global Securities (as defined under "--Book-Entry and Settlement"). Under
certain limited circumstances, Convertible Debentures may be issued in
certificated form in exchange for a Global Security. In the event that
Convertible Debentures are issued in certificated form, such Convertible
Debentures will be in denominations of $50 and integral multiples thereof and
may be transferred or exchanged at the offices described below.
Payments on Convertible Debentures issued as a Global Security will be made
to DTC, a successor depository or, in the event that no depository is used, to a
Paying Agent for the Convertible Debentures. In the event Convertible Debentures
are issued in certificated form, principal and interest will be payable, the
transfer of the Convertible Debentures will be registrable and Convertible
Debentures will be exchangeable for Convertible Debentures of other
denominations of a like aggregate principal amount at the corporate trust office
of the Indenture Trustee, or an agent of the Indenture Trustee, in The City of
New York; PROVIDED, HOWEVER, that unless the Convertible Debentures are held by
the Trust or any successor permissible under "Description of the Preferred
Securities--Merger, Consolidation or Amalgamation of the Trust," payment of
interest may be made at the option of the Company by check mailed to the address
of the persons entitled thereto.
There are no covenants or provisions in the Indenture that afford holders of
Convertible Debentures protection in the event of a highly leveraged transaction
or other similar transaction involving the Company that may adversely affect
such holders.
INTEREST
Each Convertible Debenture bears interest at the rate of 6 3/4% per annum
from the Original Offering Date, payable quarterly in arrears on January 1,
April 1, July 1 and October 1 (each, an "Interest Payment Date"), commencing
January 1, 1997, to the person in whose name such Convertible Debenture is
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registered, subject to certain exceptions, at the close of business on the
Business Day next preceding such Interest Payment Date. If any Preferred
Securities are held in certificated form, the record date for each Interest
Payment Date shall be 15 days prior to such Interest Payment Date.
The amount of interest payable for any period is computed on the basis of a
360-day year of twelve 30-day months. The amount of interest payable for any
period shorter than a full quarterly period is computed on the basis of the
actual number of days elapsed. In the event that any date on which interest is
payable on the Convertible Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day which is a
Business Day (without any interest or other payment in respect of any such
delay), except that, if such Business Day is in the next succeeding calendar
year, such payment shall be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right at any time during the term of the Convertible
Debentures to defer interest payments from time to time by extending the
interest payment period for successive periods not exceeding 20 consecutive
quarters for each such period; PROVIDED no Extension Period may extend beyond
the maturity date of the Convertible Debentures. At the end of each Extension
Period, the Company shall pay all interest then accrued and unpaid (including
any Additional Interest and Liquidated Damages) together with interest thereon
compounded quarterly at the rate specified for the Convertible Debentures to the
extent permitted by applicable law ("Compounded Interest"); PROVIDED that during
any Extension Period, the Company (a) shall not, and shall not allow any of its
subsidiaries (other than its wholly-owned subsidiaries) to, declare or pay
dividends on, make distributions with respect to, or redeem, purchase or
acquire, or make a liquidation payment with respect to, any of its capital stock
(except for (i) dividends or distributions in shares of Company Common Stock on
Company Common Stock or on its Preferred Stock, (ii) purchases or acquisitions
of shares of Company Common Stock made in connection with any employee benefit
plan of the Company or its subsidiaries in the ordinary course of business or
pursuant to employment agreements with officers or employees of the Company or
its subsidiaries entered into in the ordinary course of business, provided that
repurchases by the Company made from officers or employees of the Company or its
subsidiaries pursuant to employment agreements shall be made at a price not to
exceed the market value on the date of any such repurchase and shall not exceed
$1 million in the aggregate for all such employees and officers, (iii)
conversions or exchanges of any shares of any class of common stock into any
other class of common stock and (iv) purchases of fractional interests of shares
of the Company's capital stock pursuant to the conversion or exchange provisions
of any of the Company's securities being converted or exchanged), (b) shall not,
and shall not allow any of its subsidiaries to, make any payment of interest,
principal or premium, if any, on or repay, repurchase or redeem, any debt
securities issued by the Company that rank junior to or PARI PASSU with the
Convertible Debenturesand (c) shall not, and shall not allow any of its
subsidiaries to,make any guarantee payments with respect to the foregoing. Prior
to the termination of any such Extension Period, the Company may further extend
such Extension Period; PROVIDED, that such Extension Period together with all
previous and further extensions thereof may not exceed 20 consecutive quarters
and may not extend beyond the maturity of the Convertible Debentures. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject to the above requirements.
No interest during an Extension Period, except at the end thereof, shall be due
and payable. The Company does not have any current intention of exercising its
right to defer payments of interest by extending the interest payment period on
the Convertible Debentures. If the Property Trustee shall be the sole holder of
the Convertible Debentures, the Company shall give the Regular Trustees, the
Property Trustee and the Indenture Trustee notice of its selection of such
Extension Period at least one Business Day prior to the earlier of (i) the date
the distributions on the Preferred Securities are payable or (ii) the date the
Trust is required to give notice to the NYSE (or any applicable self-regulatory
organization) or to holders of the Preferred Securities of the record date or
the date such distribution is payable, but in any event not less
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than ten Business Days prior to such record date. The Trust shall give notice of
the selection of such Extension Period to the holders of the Preferred
Securities. If the Property Trustee shall not be the sole holder of the
Convertible Debentures, the Company shall give the holders of the Convertible
Debentures notice of its selection of such Extension Period at least ten
Business Days prior to the earlier of (i) the Interest Payment Date or (ii) the
date the Company is required to give notice to the NYSE (or any applicable
self-regulatory organization) or to holders of the Convertible Debentures of the
record or payment date of such related interest payment, but in any event not
less than two Business Days prior to such record date.
ADDITIONAL INTEREST
If at any time while the Property Trustee is the holder of the Convertible
Debentures, the Trust or the Property Trustee would be required to pay any
taxes, duties, assessments or governmental charges of whatever nature (other
than withholding taxes) imposed by the United States, or any other taxing
authority, then, in any such case, the Company will pay as additional interest
("Additional Interest") such amounts as shall be required so that the net
amounts received and retained by the Trust after paying any such taxes, duties,
assessments or governmental charges will be not less than the amounts the Trust
would have received had no such taxes, duties, assessments or governmental
charges been imposed.
CONVERSION OF THE CONVERTIBLE DEBENTURES
The Convertible Debentures are convertible into Company Common Stock at the
option of the holders of the Convertible Debentures at any time prior to the
close of business on the Business Day immediately preceding the date of
repayment of such Convertible Debentures, whether at maturity or upon
redemption, at the initial conversion price set forth on the cover page of this
Prospectus subject to the conversion price adjustments described under
"Description of the Preferred Securities--Conversion Rights." The Trust has
covenanted not to convert Convertible Debentures held by it except pursuant to a
notice of conversion delivered to the Conversion Agent by a holder of Preferred
Securities. Upon surrender of a Preferred Security to the Conversion Agent for
conversion, the Trust will distribute $50 principal amount of the Convertible
Debentures to the Conversion Agent on behalf of the holder of the Preferred
Securities so converted, whereupon the Conversion Agent will convert such
Convertible Debentures to Company Common Stock on behalf of such holder. The
Company's delivery to the holders of the Convertible Debentures (through the
Conversion Agent) of the fixed number of shares of Company Common Stock into
which the Convertible Debentures are convertible (together with the cash
payment, if any, in lieu of fractional shares) will be deemed to satisfy the
Company's obligation to pay the principal amount of the Convertible Debentures
so converted, and the accrued and unpaid interest thereon attributable to the
period from the last date to which interest has been paid or duly provided for,
PROVIDED, HOWEVER, that if any Convertible Debenture is converted after a record
date for payment of interest, the interest payable on the related interest
payment date with respect to such Convertible Debenture shall be paid to the
Trust (which will distribute such interest to the holder of the Preferred
Securities on the record date) or other holder of Convertible Debentures as of
the record date, as the case may be, despite such conversion.
OPTIONAL REDEMPTION
The Company shall have the right to redeem the Convertible Debentures, in
whole or in part, at any time or from time to time on or after October 5, 1999
upon not less than 30 nor more than 60 days' notice, at the following optional
redemption prices (expressed as a percentage of the principal amount of
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Convertible Debentures), if redeemed during the 12-month period beginning
October 1 of the year shown below (October 5, in the case of 1999):
<TABLE>
<CAPTION>
OPTIONAL
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- -----------
<S> <C>
1999................................................................... 104.725%
2000................................................................... 104.050
2001................................................................... 103.375
2002................................................................... 102.700
2003................................................................... 102.025
2004................................................................... 101.350
2005................................................................... 100.675
2006 and thereafter.................................................... 100.000
</TABLE>
plus, in each case, accrued and unpaid interest, including Additional Interest
and Liquidated Damages, if any, to the redemption date.
If a partial redemption of the Preferred Securities resulting from a partial
redemption of the Convertible Debentures would result in the delisting of the
Preferred Securities, the Company may only redeem Convertible Debentures in
whole.
PROPOSED TAX LEGISLATION
On March 19, 1996, as part of President Clinton's fiscal 1997 Budget
Proposal, the Treasury Department proposed the Proposed Legislation that, among
other things, would treat as equity for United States Federal income tax
purposes instruments with a maximum term of more than 20 years that are not
shown as indebtedness on the consolidated balance sheet of the issuer. On March
29, 1996, Senate Finance Committee Chairman William V. Roth, Jr. and House Ways
and Means Committee Chairman Bill Archer issued the Joint Statement indicating
their intent that certain legislative proposals initiated by the Clinton
administration, including the Proposed Legislation, that may be adopted by
either of the tax-writing committees of Congress, would have an effective date
that is no earlier than the date of "appropriate Congressional action." Based on
the Joint Statement, it is expected that if the Proposed Legislation were
enacted, such legislation would not apply to the Convertible Debentures since
they are expected to be issued prior to the date of any "appropriate
Congressional action." There can be no assurance, however, that any proposed
legislation enacted after the date hereof will not otherwise adversely affect
the tax treatment of the Convertible Debentures. If legislation is enacted that
adversely affects the tax treatment of the Convertible Debentures, such
legislation could result in the distribution of the Convertible Debentures to
holders of the Preferred Securities or, in certain limited circumstances, the
redemption of such securities by the Company and the distribution of the
resulting cash in redemption of the Preferred Securities. See "Description of
the Preferred Securities--Special Event Redemption or Distribution."
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SUBORDINATION
The Indenture provides that the Convertible Debentures are subordinate and
junior in right of payment to all existing and future Senior Indebtedness of the
Company. No payment of principal of (including redemption payments, if any),
premium, if any, or interest on, the Convertible Debentures may be made if (i)
any Senior Indebtedness of the Company is not paid when due and any applicable
grace period with respect to such default has ended and such default has not
been cured or waived, or ceased to exist or (ii) the maturity of any Senior
Indebtedness of the Company has been accelerated because of a default. Upon any
distribution of assets of the Company to creditors upon any dissolution, winding
up, liquidation or reorganization, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all principal of, and
premium, if any, and interest due or to become due on, all Senior Indebtedness
of the Company must be paid in full before the holders of the Convertible
Debentures are entitled to receive or retain any payment. Upon satisfaction of
all claims related to all Senior Indebtedness of the Company then outstanding,
the rights of the holders of the Preferred Securities will be subrogated to the
rights of the holders of Senior Indebtedness of the Company to receive payments
or distributions applicable to Senior Indebtedness until all amounts owing on
the Convertible Debentures are paid in full.
The term "Senior Indebtedness" means in respect of the Company: (i) the
principal, premium, if any, and interest in respect of (A) indebtedness of such
obligor for money borrowed and (B) indebtedness evidenced by securities,
debentures, bonds, notes or other similar instruments issued by such obligor or
credit facilities with lending institutions or commercial lenders, (ii) all
capital lease obligations of such obligor, (iii) all obligations of such obligor
issued or assumed as the deferred purchase price of property, all conditional
sale obligations of such obligor and all obligations of such obligor under any
title retention agreement (but excluding trade accounts payable arising in the
ordinary course of business), (iv) all obligations of such obligor for the
reimbursement of any letter of credit, banker's acceptance, security purchase
facility or similar credit transaction, (v) commitment or standby fees due and
payable to lending institutions with respect to credit facilities available to
the Company, (vi) obligations under interest rate and currency swaps, floors,
caps and other arrangements intended to fix interest rate obligations, (vii) all
obligations of the type referred to in clauses (i) through (vi) above of other
persons for the payment of which such obligor is responsible or liable as
obligor, guarantor or otherwise, and (viii) all obligations of the type referred
to in clauses (i) through (vii) above of other persons secured by any lien on
any property or asset of such obligor (whether or not such obligation is assumed
by such obligor), except for (1) the Convertible Debentures, (2) any such
indebtedness that is by its terms subordinated to or PARI PASSU with the
Convertible Debentures and (3) any indebtedness between or among such obligor or
its affiliates, including all other debt securities and guarantees in respect of
those debt securities issued to any other trust, or trustee of such trust,
partnership or other entity affiliated with the Company that is, directly or
indirectly, a financing vehicle of the Company (a "Financing Entity") in
connection with the issuance by such Financing Entity of preferred securities or
other securities that rank PARI PASSU with, or junior to, the Preferred
Securities. Such Senior Indebtedness shall continue to be Senior Indebtedness
and entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of such Senior Indebtedness.
The Convertible Debentures are obligations exclusively of the Company.
Certain of the Company's operations are conducted through subsidiaries. To the
extent that the Company conducts any material part of its operations in the
future through subsidiaries, the cash flow and the consequent ability to service
debt, including the Convertible Debentures of the Company, may become dependent
upon the earnings of such subsidiaries and the distribution of those earnings
to, or upon loans, royalties, license fees or other payments of funds by those
subsidiaries, to the Company. The Company's subsidiaries are and will in the
future be separate and distinct legal entities and will have no obligation,
contingent or otherwise, to pay any amounts due pursuant to the Convertible
Debentures or to make any funds available therefor, whether by dividends, loans
or other payments. In addition, the payment of dividends and the making of loans
and
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advances to the Company by its subsidiaries are subject to certain statutory or
contractual restrictions, are dependent upon the earnings of such subsidiaries
and are subject to various business considerations.
Any right of the Company to receive assets of its subsidiaries upon their
liquidation or reorganization (and the consequent right of the holders of the
Convertible Debentures to participate in these assets) will be effectively
subordinated to the claims of any such subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would still
be subordinate to any security interests in the assets of such subsidiary and
any indebtedness of such subsidiary senior to that held by the Company.
The Indenture does not limit the aggregate amount of Senior Indebtedness
that may be issued by the Company or its subsidiaries. At November 30, 1996,
Senior Indebtedness of the Company aggregated approximately $111.1 million. See
"Capitalization."
CERTAIN COVENANTS
In the Indenture, the Company has covenanted (i) to directly or indirectly
maintain 100% ownership of the Common Securities of the Trust; PROVIDED,
HOWEVER, that any permitted successor of the Company under the Indenture may
succeed to the Company ownership; (ii) not to cause, as sponsor of the Trust, or
to permit, as holder of the Common Securities, the dissolution, winding-up or
termination of the Trust, except in connection with certain mergers,
consolidations or amalgamations; and (iii) to use its reasonable efforts to
cause the Trust (x) to remain a statutory business trust, except in connection
with the distribution of Convertible Debentures to the holders of Trust
Securities in liquidation of the Trust, the redemption of all of the Trust
Securities of the Trust, or certain mergers, consolidations or amalgamations,
each as permitted by the Declaration, and (y) to otherwise continue to be
classified as a grantor trust for United States Federal income tax purposes.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture provides that the Company will not consolidate with or merge
into any other entity or convey, transfer or lease its assets substantially as
an entirety unless (a) if the Company is not the survivor, the successor is a
corporation organized in the United States and expressly assumes the due and
punctual payment of the principal of (and premium, if any) and interest on all
Convertible Debentures issued thereunder and the performance of every other
covenant of the Indenture on the part of the Company as the case may be, and (b)
immediately thereafter no event of default under the Indenture and no event
which, after notice or lapse of time, or both, would become an event of default
under the Indenture, shall have happened and be continuing. Upon any such
consolidation, merger, conveyance or transfer, the successor corporation shall
succeed to and be substituted for the Company under the Indenture and thereafter
the predecessor corporation shall be relieved of all obligations and covenants
under the Indenture and the Convertible Debentures.
BOOK-ENTRY AND SETTLEMENT
If distributed to holders of the Preferred Securities in connection with the
involuntary or voluntary dissolution, winding-up or liquidation of the Trust as
a result of the occurrence of a Special Event, the Convertible Debentures will
be issued in the same form as the Preferred Securities which such Convertible
Debentures replace. Any Global Certificate will be replaced by one or more
global certificates (each a "Global Security") registered in the name of the
depository or its nominee. Except under the limited circumstances described
below, the Convertible Debentures represented by the Global Security will not be
exchangeable for, and will not otherwise be issuable as, Convertible Debentures
in definitive form. The Global Securities described above may not be transferred
except by the depository to a nominee of the depository or by a nominee of the
depository to the depository or another nominee of the depository or to a
successor depository or its nominee.
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The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such laws may
impair the ability to transfer beneficial interests in such a Global Security.
Except as provided below, owners of beneficial interests in such a Global
Security will not be entitled to receive physical delivery of Convertible
Debentures in definitive form and will not be considered the holders thereof for
any purpose under the Indenture, and no Global Security representing Convertible
Debentures shall be exchangeable, except for another Global Security of like
denomination and tenor to be registered in the name of the depository or its
nominee or to a successor depository or its nominee. Accordingly, each
Beneficial Owner must rely on the procedures of DTC or if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest to exercise any rights of a holder under the Indenture.
THE DEPOSITORY
If Convertible Debentures are distributed to holders of Preferred Securities
in liquidation of such holders' interests in the Trust and a Global Security is
issued, DTC will act as securities depository for the Convertible Debentures
represented by such Global Security. For a description of DTC and the specific
terms of the depository arrangements, see "Description of the Preferred
Securities--Book-Entry Only Issuance--The Depository Trust Company." As of the
date of this Prospectus, the description therein of DTC's book-entry system and
DTC's practices as they relate to purchases, transfers, notices and payments
with respect to the Preferred Securities apply in all material respects to any
debt obligations represented by one or more Global Securities held by DTC. The
Company may appoint a successor to DTC or any successor depository in the event
DTC or such successor depository is unable or unwilling to continue as a
depository for the Global Securities.
None of the Company, the Trust, the Indenture Trustee, any paying agent and
any other agent of the Company or the Indenture Trustee has any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in a Global Security for such
Convertible Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DISCONTINUANCE OF THE DEPOSITORY'S SERVICES
A Global Security shall be exchangeable for Convertible Debentures
registered in the names of persons other than the Depository or its nominee only
if (i) the Depository notifies the Company that it is unwilling or unable to
continue as a depository for such Global Security and no successor depository
shall have been appointed, (ii) the Depository, at any time, ceases to be a
clearing agency registered under the Exchange Act at which time the Depository
is required to be so registered to act as such depository and no successor
depository shall have been appointed, (iii) the Company in its sole discretion,
determines that such Global Security shall be so exchangeable or (iv) there
shall have occurred an Event of Default with respect to such Convertible
Debentures. Any Global Security that is exchangeable pursuant to the preceding
sentence shall be exchangeable for Convertible Debentures registered in such
names as the Depository shall direct. It is expected that such instructions will
be based upon directions received by the Depository from its Participants with
respect to ownership of beneficial interests in such Global Security.
EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Event of Default"
with respect to the Convertible Debentures: (i) failure for 30 days to pay
interest on the Convertible Debentures, including any Additional Interest,
Compounded Interest and Liquidated Damages in respect thereof, when due,
provided that a valid extension of an interest payment period will not
constitute a default in the payment of interest (including any Additional
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Interest, Compounded Interest or Liquidated Damages) for this purpose; (ii)
failure to pay principal of or premium, if any, on the Convertible Debentures
when due whether at maturity, upon redemption, by declaration or otherwise;
(iii) failure by the Company to deliver shares of Company Common Stock upon an
election by a holder of Preferred Securities to convert such Preferred
Securities; (iv) failure to observe or perform any other covenant contained in
the Indenture for 60 days after notice to the Company by the Trustee or by the
holders of not less than 25% in aggregate outstanding principal amount of the
Convertible Debentures; (v) default under any bond, debenture or any other
evidence relating to indebtedness for money borrowed of the Company or any of
its significant subsidiaries having an aggregate outstanding principal amount in
excess of $20 million, which default shall have resulted in such indebtedness
being accelerated, or failure to pay when due (beyond any applicable grace
periods) any such indebtedness, without such indebtedness being discharged, such
acceleration having been rescinded or annulled or such failure to pay having
been cured or waived, within 30 days after receipt of notice thereof by the
Company from the Trustee or by the Company and the Trustee from the holders of
not less than 25% in aggregate principal amount at maturity of the Convertible
Debentures then outstanding; (vi) the dissolution, winding up or termination of
the Trust, except in connection with the distribution of Convertible Debentures
to the holders of Preferred Securities in liquidation of the trust upon the
redemption of all outstanding Preferred Securities and in connection with
certain mergers, consolidations or amalgamations permitted by the Declaration;
or (vii) certain events in bankruptcy, insolvency or reorganization of the
Company or any of its significant subsidiaries.
The Trustee or the holders of not less than 25% in aggregate outstanding
principal amount of the Convertible Debentures may declare the principal of and
interest on the Convertible Debentures due and payable immediately on the
occurrence of an Event of Default; PROVIDED, HOWEVER, that, after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding Convertible
Debentures may, under certain circumstances, rescind and annul such acceleration
if all Events of Default, other than the nonpayment of accelerated principal,
have been cured or waived as provided in the Indenture. For information as to
waiver of Defaults, see "--Modifications and Amendments of the Indenture."
Notwithstanding the foregoing, if an Indenture Event of Default has occurred
and is continuing and such event is attributable to the failure of the Company
to pay interest or principal on the Convertible Debentures on the date such
interest or principal is otherwise payable, the Company acknowledges that, in
such event, a holder of Preferred Securities may institute a Direct Action for
payment on or after the respective due date specified in the Convertible
Debentures. The Company may not amend the Indenture to remove the foregoing
right to bring a Direct Action without the prior written consent of all the
holders of Preferred Securities. Notwithstanding any payment made to such holder
of Preferred Securities by the Company in connection with a Direct Action, the
Company shall remain obligated to pay the principal of or interest on the
Convertible Debentures held by the Trust or the Property Trustee and the Company
shall be subrogated to the rights of the holder of such Preferred Securities
with respect to payments on the Preferred Securities to the extent of any
payments made by the Company to such holder in any Direct Action. The holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Convertible Debentures.
The holders of not less than a majority in principal amount of the
outstanding Convertible Debentures may on behalf of the holders of all the
Convertible Debentures waive any past defaults except (i) a default in payment
of the principal of (or premium, if any) or interest, if any, on any Convertible
Debentures and (ii) a default in respect of a covenant or provision of the
Indenture which cannot be amended or modified without the consent of the holder
of each Convertible Debenture; PROVIDED, HOWEVER, that if the Convertible
Debentures are held by the Trust or a trustee of such Trust, such waiver or
modulation to such waiver shall not be effective until the holders of a majority
in liquidation amount of Trust Securities shall have consented to such waiver or
modification to such waiver; and PROVIDED FURTHER, that if the consent of the
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holder of each outstanding Convertible Debenture is required, such waiver shall
not be effective until each holder of the Trust Securities shall have consented
to such waiver.
Except as provided above, a default under any other indebtedness of the
Company would not constitute an Event of Default under the Convertible
Debentures.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default shall occur and be continuing, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any holders of
Convertible Debentures, unless such holders shall have offered to the Indenture
Trustee reasonable security or indemnity. Subject to such provisions for the
indemnification of the Indenture Trustee, the holders of a majority in aggregate
principal amount of the Convertible Debentures then outstanding will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Indenture Trustee, or exercising any trust or powers
conferred on the Indenture Trustee.
No holder of any Convertible Debenture has any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
(i) such holder shall have previously given to Indenture Trustee written notice
of a continuing Event of Default, (ii) if the Trust is not the sole holder of
Convertible Debentures, the holders of at least 25% in aggregate principal
amount of the Convertible Debentures then Outstanding shall also have made
written request, (iii) such holder has offered reasonable indemnity to the
Indenture Trustee to institute such proceeding as Indenture Trustee, (iv) the
Indenture Trustee shall have failed to institute such Proceeding within 60 days
of such notice and (v) the Indenture Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Convertible Debentures a direction inconsistent with such request. However, such
limitations do not apply to a suit instituted by a holder of a Convertible
Debenture for enforcement of payment of the principal of or interest on such
Convertible Debenture on or after the respective due dates expressed in such
Convertible Debenture.
The Company is required to file annually with the Indenture Trustee and the
Property Trustee a certificate as to whether or not the Company is in compliance
with all the conditions and covenants under the Indenture.
MODIFICATIONS AND AMENDMENTS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Indenture
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Convertible Debentures, to modify
the Indenture or the rights of the holders of Convertible Debentures; PROVIDED,
HOWEVER, that no such modification may, without the consent of the holder of
each outstanding Convertible Debenture affected thereby, (i) extend the stated
maturity of the Convertible Debentures or reduce the principal amount thereof,
or reduce the rate or extend the time of payment of interest thereon, or reduce
any premium payable upon the redemption thereof, or adversely affect the right
to convert Convertible Debentures or (ii) reduce the percentage in aggregate
principal amount of outstanding Convertible Debentures, the holders of which are
required to consent to any such supplemental indenture.
In addition, the Company and the Indenture Trustee may execute, without the
consent of any holder of Convertible Debentures, any supplemental indenture to
cure any ambiguities, to comply with the Trust Indenture Act and for certain
other customary purposes.
GOVERNING LAW
The Indenture and the Convertible Debentures are governed by, and shall be
construed in accordance with, the laws of the State of New York.
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INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee, prior to default, has undertaken to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Convertible Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
EFFECT OF OBLIGATIONS UNDER THE CONVERTIBLE
DEBENTURES AND THE GUARANTEE
As set forth in the Declaration, the sole purpose of the Trust is to issue
the Trust Securities evidencing undivided beneficial interests in the assets of
the Trust and to invest the proceeds from such issuance and sale in the
Convertible Debentures.
As long as payments of interest and other payments are made when due on the
Convertible Debentures, such payments will be sufficient to cover distributions
and payments due on the Trust Securities because of the following factors: (i)
the aggregate principal amount of Convertible Debentures will be equal to the
sum of the aggregate stated liquidation amount of the Trust Securities; (ii) the
interest rate and the interest and other payment dates on the Convertible
Debentures will match the distribution rate and distribution and other payment
dates for the Preferred Securities; (iii) pursuant to the Indenture, the Company
shall, directly or indirectly, pay all, and the Trust shall not be obligated to
pay any, costs, expenses, debt and obligations of the Trust other than with
respect to the Trust Securities; and (iv) the Declaration further provides that
the Issuer Trustees will not cause or permit the Trust to, among other things,
engage in any activity that is not consistent with the purposes of the Trust.
Payments of distributions (to the extent funds therefor are available) and
other payments due on the Preferred Securities (to the extent funds therefor are
available) are guaranteed by the Company as and to the extent set forth under
"Description of the Guarantee." If the Company does not make interest payments
on the Convertible Debentures purchased by the Trust, the Trust will not have
sufficient funds to pay distributions on the Preferred Securities. The Guarantee
is a guarantee with respect to the Preferred Securities from the time of its
issuance but does not apply to any payment of distributions unless and until the
Trust has sufficient funds for the payment of such distributions.
The Guarantee covers the payment of distributions and other payments on the
Preferred Securities only if and to the extent that the Company has made a
payment of interest or principal on the Convertible Debentures held by the Trust
as its sole asset. The Guarantee, when taken together with the Company's
obligations under the Convertible Debentures and the Indenture and its
obligations under the Declaration, including its obligations to pay costs,
expenses, debts and liabilities of the Trust (other than with respect to the
Trust Securities), provide a full and unconditional guarantee of amounts due on
the Preferred Securities.
If the Company fails to make interest or other payments on the Convertible
Debentures when due (taking account of any Extension Period), the Declaration
provides a mechanism whereby the holders of the Preferred Securities, using the
procedures described in "Description of the Preferred Securities-- Book-Entry
Only Issuance--The Depository Trust Company" and "Description of the Preferred
Securities--Voting Rights," may direct the Property Trustee to enforce its
rights under the Convertible Debentures. If the Property Trustee fails to
enforce its rights under the Convertible Debentures, any holder of Preferred
Securities may directly institute a legal proceeding against the Company to
enforce the Property Trustee rights under the Convertible Debentures without
first instituting any legal proceeding against the Property Trustee or any other
person or entity. Notwithstanding the foregoing, if a Declaration Event of
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Default has occurred and is continuing and such event is attributable to the
failure of the Company to pay interest or principal on the Convertible
Debentures on the date such interest or principal is otherwise available (or in
the case of redemption, on the redemption date), then a holder of Preferred
Securities may institute a Direct Action for payment on or after the respective
due date specified in the Convertible Debentures. In connection with such Direct
Action, the Company will be subrogated to the rights of such holder of Preferred
Securities under the Declaration to the extent of any payment made by the
Company to such holder of Preferred Securities in such Direct Action. The
Company, under the Guarantee, acknowledges that the Guarantee Trustee shall
enforce the Guarantee on behalf of the holders of the Preferred Securities. If
the Company fails to make payments under the Guarantee, the Guarantee provides a
mechanism whereby the holders of the Preferred Securities may direct the
Guarantee Trustee to enforce its rights thereunder. Any holder of Preferred
Securities may directly institute a legal proceeding against the Company to
enforce the Guarantee Trustee's rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee or any
other person or entity.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 100,000,000
shares of common stock, par value $.001 per share, and (ii) 15,000,000 shares of
preferred stock, par value $.01 per share, which are subject to future issuance
as determined by the Board of Directors of the Company.
COMMON STOCK
Holders of Company Common Stock are entitled to one vote per share on all
matters on which the holders of Company Common Stock are entitled to vote and do
not have any cumulative voting rights. Holders of Company Common Stock are
entitled to receive such dividends as may from time to time be declared by the
Board of Directors of the Company out of funds legally available therefor.
Holders of Company Common Stock have no preemptive, conversion, redemption or
sinking fund rights. In the event of a liquidation, dissolution of winding-up of
the Company, holders of Company Common Stock are entitled to share ratably in
the assets of the Company, if any, remaining after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
series of preferred stock. The outstanding shares of Company Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of holders
of Company Common Stock are subject to any series of Preferred Stock that the
Company may issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights, redemption
privileges, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the stockholders
of the Company. The issuance of Preferred Stock by the Board of Directors could
adversely affect the rights of holders of Company Common Stock. For example,
issuance of Preferred Stock could result in a series of securities outstanding
that would have preferences over the Company Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights appurtenant to Company Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy, consent or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue Preferred Stock without stockholder approval and with voting and
conversion rights that could adversely affect the voting power of holders of
Company Common Stock. There are no
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agreements or understandings for the issuance of Preferred Stock, and the Board
of Directors has no present intention to issue Preferred Stock.
REGISTRATION RIGHTS
The Company has granted to the owners of approximately 20,330,974 shares of
Company Common Stock (including a number of shares subject to exercise under
presently-exercisable options) the right to request that the Company effect the
registration of any or all of such shares or to include any or all of such
shares in any registration statement to be filed by the Company relating to the
registration of Company Common Stock under the Securities Act (other than
registration statements on Form S-4 or Form S-8). Upon such request, the Company
is required to file a registration statement covering such shares or to include
such shares in such registration statement, as applicable, except that, in the
case of certain requested registrations, the Company is not obligated to file
any registration statement initiated pursuant to a request by any such holder
within six months of a prior request for registration by any such holder. In
certain cases, the Company's obligation to effect any such requested
registration is subject to other limitations, including a minimum aggregate
offering price of the shares being registered.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL ("Section 203") prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved either the business combination
or the transaction in which the interested stockholder became an interested
stockholder; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
DIRECTORS' LIABILITY
The Certificate of Incorporation contains provisions that eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty other than liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL or any transaction from which the director derived an improper personal
benefit. The Company's By-laws contain provisions requiring the indemnification
of the Company's directors and officers to the fullest extent permitted by
Section 145 of the DGCL, including circumstances in which indemnification is
otherwise discretionary. The Company has entered into indemnification agreements
with each of its directors that provide for indemnification of such directors to
the fullest extent permitted by the DGCL. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company Common Stock is ChaseMellon
Shareholder Services.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
In the opinion of Arter & Hadden, special United States tax counsel to the
Company and the Trust, the following is a summary of certain of the material
United States Federal income tax consequences of the purchase, ownership,
disposition and conversion of Preferred Securities. Unless otherwise stated,
this summary deals only with Preferred Securities held as capital assets. This
summary addresses the United States Federal income tax considerations to holders
of Preferred Securities who are citizens or residents of the United States or
any political subdivision thereof or therein, or estates or trusts the income of
which is subject to United States Federal income taxation regardless of its
source or other holders who are otherwise subject to United States federal
income taxation on a net income basis with respect to Preferred Securities
("U.S. Holders") and does not address the tax consequences to holders of
Preferred Securities who are not U.S. Holders. This summary does not deal with
special classes of holders such as banks, thrifts, real estate investment
trusts, regulated investment companies, insurance companies, dealers in
securities or currencies, tax-exempt investors, or persons that will hold the
Preferred Securities as other than a capital asset. This summary also does not
address the tax consequences to persons that have a functional currency other
than the U.S. Dollar or the tax consequences to shareholders, partners or
beneficiaries of a holder of Preferred Securities. Further, it does not include
any description of any alternative minimum tax consequences or the tax laws of
any state or local government or of any foreign government that may be
applicable to the Preferred Securities. This summary is based on the Code,
Treasury regulations thereunder and administrative and judicial interpretations
thereof, as of the date hereof, all of which are subject to change, possibly on
a retroactive basis.
CLASSIFICATION OF THE CONVERTIBLE DEBENTURES
The Company has taken the position that the Convertible Debentures will be
classified for United States Federal income tax purposes as indebtedness of the
Company under current law, and, by acceptance of a Preferred Security, each
holder covenants to treat the Convertible Debentures as indebtedness and the
Preferred Securities as evidence of an indirect beneficial ownership interest in
the Convertible Debentures. No assurance can be given, however, that such
position of the Company will not be challenged by the Internal Revenue Service
or, if challenged, that such a challenge will not be successful. The remainder
of this discussion assumes that the Convertible Debentures will be classified as
indebtedness of the Company for United States Federal income tax purposes.
CLASSIFICATION OF THE TRUST
In connection with the issuance of the Preferred Securities, Arter & Hadden,
special United States tax counsel to the Company and the Trust, has rendered its
opinion in connection with the Original Offering and the Over-Allotment Offering
to the effect that, under then current law and assuming full compliance with the
terms of the Declaration and the Indenture (and certain other documents relating
to the offering referred to herein), and based on certain facts and assumptions
contained in such opinion, the Trust was classified for United Stated Federal
income tax purposes as a grantor trust and not as an association taxable as a
corporation. Accordingly, for United States Federal income tax purposes, each
holder of Preferred Securities generally will be considered the owner of an
undivided interest in the Convertible Debentures, and each holder will be
required to include in its gross income any original issue discount accrued with
respect to its allocable share of those Convertible Debentures.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
Because the Company has the option, under the terms of the Convertible
Debentures, to defer payments of interest by extending interest payment periods
for up to 20 quarters, all of the stated interest payments on the Convertible
Debentures will be treated as "original issue discount." Holders of debt
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instruments issued with OID must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. Generally, all of a holder's
taxable interest income with respect to the Convertible Debentures will be
accounted for as OID. Actual payments and distributions of stated interest
(including payments of accrued interest upon conversion of the Convertible
Debentures) will not, however, be separately reported as taxable income. The
amount of OID that accrues in any quarter will approximately equal the amount of
the interest that accrues on the Convertible Debentures in that quarter at the
stated interest rate. In the event that the interest payment period is extended,
holders will continue to accrue OID approximately equal to the amount of the
interest payment due at the end of the extended interest payment period on an
economic accrual basis over the length of the extended interest payment period.
Corporate holders of Preferred Securities will not be entitled to a
dividends-received deduction with respect to any income recognized with respect
to the Preferred Securities.
MARKET DISCOUNT AND BOND PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Convertible Debentures with market discount or
acquisition premium as such phrases are defined for United States Federal income
tax purposes. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
Preferred Securities.
RECEIPT OF CONVERTIBLE DEBENTURES OR CASH UPON LIQUIDATION OF THE TRUST
Under certain circumstances, as described under the caption "Description of
the Preferred Securities--Special Event Redemption or Distribution," Convertible
Debentures may be distributed to holders in exchange for the Preferred
Securities and in liquidation of the Trust. Under current law, such a
distribution to holders, for United States Federal income tax purposes, would be
treated as a nontaxable event to each holder, and each holder would receive an
aggregate tax basis in the Convertible Debentures equal to such holder's
aggregate tax basis in its Preferred Securities. A holder's holding period in
the Convertible Debentures so received in liquidation of the Trust would include
the period during which the Preferred Securities were held by such holder. If,
however, the related Special Event is a Tax Event which results in the Trust
being treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the Preferred Securities, in
which event the Company, if it elected to eliminate the Trust, would generally
be required to cause the redemption of the Convertible Debentures for cash and
distribute the redemption proceeds to the holders in liquidation of the Trust.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Convertible Debentures may be redeemed for cash and
the proceeds of such redemption distributed to holders in redemption of their
Preferred Securities. Under current law, such a redemption would, for United
States Federal income tax purposes, constitute a taxable disposition of the
redeemed Preferred Securities, and a holder would recognize gain or loss as if
it sold such redeemed Preferred Securities for cash. See "--Sales of Preferred
Securities."
SALES OF PREFERRED SECURITIES
A holder that sells Preferred Securities will recognize gain or loss equal
to the difference between the amount realized on the sale of the Preferred
Securities and the holder's adjusted tax basis in such Preferred Securities. A
holder's adjusted tax basis in the Preferred Securities generally will be its
initial purchase price increased by OID previously includible in such holder's
gross income to the date of disposition and decreased by payments received on
the Preferred Securities to the date of disposition. Such gain or loss will be a
capital gain or loss and will be a long-term capital gain or loss if the
Preferred Securities have been held for more than one year at the time of sale.
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The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest with respect to the underlying
Convertible Debentures. A holder who disposes of or converts his Preferred
Securities between record dates for payments of distributions thereon will be
required to include accrued but unpaid interest on the Convertible Debentures
through the date of disposition or conversion in income as ordinary income, and
to add such amount to his adjusted tax basis in his PRO RATA share of the
underlying Convertible Debentures deemed disposed of or converted. To the extent
the selling price is less than the holder's adjusted tax basis (which basis will
include, in the form of OID, all accrued but unpaid interest), a holder will
recognize a capital loss. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States Federal income tax
purposes.
PROPOSED TAX LEGISLATION
On March 19, 1996, as part of President Clinton's fiscal 1997 Budget
Proposal, the Treasury Department proposed the Proposed Legislation that, among
other things, would treat as equity for United States Federal income tax
purposes instruments with a maximum term of more than 20 years that are not
shown as indebtedness on the consolidated balance sheet of the issuer. On March
29, 1996, Senate Finance Committee Chairman William V. Roth, Jr. and House Ways
and Means Committee Chairman Bill Archer issued the Joint Statement indicating
their intent that certain legislative proposals initiated by the Clinton
administration, including the Proposed Legislation, that may be adopted by
either of the tax-writing committees of Congress, would have an effective date
that is no earlier than the date of "appropriate Congressional action." Based on
the Joint Statement, it is expected that if the Proposed Legislation were
enacted, such legislation would not apply to the Convertible Debentures since
they are expected to be issued prior to the date of any "appropriate
Congressional action." There can be no assurances, however, that any proposed
legislation enacted after the date hereof will not otherwise adversely affect
the tax treatment of the Convertible Debentures. If legislation is enacted that
adversely affects the tax treatment of the Convertible Debentures, such
legislation could result in the distribution of the Convertible Debentures to
holders of the Preferred Securities or, in certain limited circumstances, the
redemption of such securities by the Company and the distribution of the
resulting cash in redemption of the Preferred Securities. See "Description of
the Preferred Securities--Special Event Redemption or Distribution."
CONVERSION OF PREFERRED SECURITIES INTO COMMON STOCK
A holder will not recognize income, gain or loss upon the conversion,
through the Conversion Agent, of Preferred Securities into Company Common Stock.
A holder will, however, recognize gain upon the receipt of cash in lieu of a
fractional share of Company Common Stock equal to the amount of cash received
less the holder's tax basis in such fractional share. A holder's tax basis in
the Company Common Stock received upon conversion should generally be equal to
the holder's tax basis in the Preferred Securities delivered to the Conversion
Agent for conversion less the basis allocated to any fractional share for which
cash is received and less the amount of cash a holder receives in payment of
accrued interest on the Convertible Debentures. A holder's holding period in the
Company Common Stock received upon conversion of its Preferred Securities should
generally begin on the date the holder acquired the Preferred Securities
delivered to the Conversion Agent for conversion.
ADJUSTMENT OF CONVERSION PRICE
Treasury Regulations promulgated under Section 305 of the Code would treat
holders of Preferred Securities as having received a constructive distribution
from the Company in the event the conversion ratio of the Convertible Debentures
were adjusted if (i) as a result of such adjustment, the proportionate interest
(measured by the quantum of Company Common Stock into or for which the
Convertible Debentures are convertible) of the holders of the Preferred
Securities in the assets or earnings and profits of the Company were increased
and (ii) the adjustment was not made pursuant to a bona fide, reasonable
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antidilution formula. An adjustment in the conversion ratio would not be
considered made pursuant to such a formula if the adjustment was made to
compensate for certain taxable distributions with respect to the Company Common
Stock. Thus, under certain circumstances, a reduction in the conversion price
for the holders may result in deemed dividend income to holders to the extent of
the current or accumulated earnings and profits of the Company. Holders of the
Preferred Securities would be required to include their allocable share of such
deemed dividend income in gross income but would not receive any cash related
thereto.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, income on the Preferred Securities will be reported to holders on
Forms 1099, which forms should be mailed to holders of Preferred Securities by
January 31 following each calendar year.
Payments made on, and proceeds from the sale of, the Preferred Securities
may be subject to a "backup" withholding tax of 31% unless the holder complies
with certain identification requirements. Any withheld amounts will be allowed
as a credit against the holder's United States Federal income tax, provided the
required information is provided to the Internal Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO
THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL
OR OTHER TAX LAWS.
CERTAIN ERISA CONSIDERATIONS
Generally, an employee benefit plan that is subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975 of
the Code ("Plan"), may purchase Preferred Securities, subject to the investing
fiduciary's determination that the investment in Preferred Securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the Plan.
The Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) (the "DOL Regulation") defining what constitutes the assets of a
Plan. The DOL Regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts and certain other entities
in which a Plan makes an "equity" investment will be deemed for purposes of
ERISA to be assets of the investing plan unless certain exceptions apply.
There can be no assurance that any of the exceptions set forth in the DOL
Regulation will apply to the purchase of Preferred Securities offered hereby
and, as a result, an investing Plan's assets could be considered to include an
undivided interest in the Convertible Debentures and any other assets held in
the Trust. In the event that assets of the Trust are considered assets of an
investing Plan, the Company, the Issuer Trustees and other persons, in providing
services with respect to the Convertible Debentures, may be considered
fiduciaries to such Plan and subject to the fiduciary responsibility provisions
of Title I of ERISA and the prohibited transaction provisions of Section 4975 of
the Code with respect to transactions involving such assets unless a statutory
or administrative exemption applies.
The Company and/or any of its affiliates may be considered a "party in
interest" (within the meaning of ERISA) or a "disqualified person" (within the
meaning of Section 4975 of the Code) with respect to a Plan. The acquisition and
ownership of Preferred Securities by a Plan (or by an individual retirement
arrangement or other plan described in Section 4975(e)(1) of the Code) with
respect to which the Company or any of its affiliates is considered a party in
interest or a disqualified person may constitute or
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result in a prohibited transaction under ERISA or Section 4975 of the Code,
unless such Preferred Securities are acquired pursuant to and in accordance with
an applicable exemption.
As a result, any Plan with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable prohibited transaction exemption. A Plan or
other entity whose assets include Plan assets subject to ERISA or Section 4975
of the Code proposing to acquire Preferred Securities should consult with their
own counsel.
SELLING HOLDERS
The Preferred Securities were originally issued by the Trust and sold by
Robertson, Stephens & Company LLC, Alex. Brown & Sons Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and The Robinson-Humphrey Company, Inc.
(collectively, the "Initial Purchasers"), in transactions exempt from the
registration requirements of the Securities Act, to persons believed by such
Initial Purchasers to be "qualified institutional buyers" (as defined in Rule
144A of the Securities Act), to "institutional accredited investors" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) or outside the
United States to non-U.S. persons in off-shore transactions in reliance on
Regulation S under the Securities Act. Those purchasers, or their transferees,
pledgees, donees or successors (the "Selling Holders"), may from time to time
offer and sell pursuant to this Prospectus any or all of the Preferred
Securities, the Convertible Debentures, Company Common Stock issued upon
conversion of the Preferred Securities, and the associated Guarantee.
The Company and the Trust have filed a Registration Statement on Form S-1
(of which this Prospectus forms a part) with the Commission in order to register
the Offered Securities in accordance with the provisions of the Registration
Rights Agreement. The Registration Rights Agreement obligated the Company and
the Trust to, among other things, file a Registration Statement with regard to
the Offered Securities prior to December 16, 1996 and keep such Registration
Statement effective until three years after the date it is declared effective or
such earlier date as all Registerable Securities shall have been disposed of or
on which all Registerable Securities held by persons that are not affiliates of
the Company or the Trust may be sold without registration pursuant to Rule
144(k) under the Securities Act, or any successor provision. Although none of
the Selling Holders have advised the Company that they currently intend to sell
all or any of the Offered Securities pursuant to this Prospectus, the Selling
Holders may choose to sell the Offered Securities from time to time upon notice
to the Company and the Trust. See "Plan of Distribution."
Prior to any use of this Prospectus in connection with an offering of the
Offered Securities, this Prospectus will be supplemented to set forth the name
and the number of shares beneficially owned by the Selling Holder intending to
sell such Offered Securities, and the number of Offered Securities to be
offered. The Prospectus Supplement will also disclose whether any Selling Holder
selling in connection with such Prospectus Supplement has held any position or
office with, been employed by or otherwise has a material relationship with, the
Company or any of its affiliates during the three (3) years prior to the date of
the Prospectus Supplement.
PLAN OF DISTRIBUTION
The Offered Securities may be sold from time to time to purchasers directly
by the Selling Holders. Alternatively, the Selling Holders may from time to time
offer the Offered Securities to or through underwriters, broker/dealers or
agents, who may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Holders or the purchasers of such
securities for whom they may act as agents. The Selling Holders and any
underwriters, broker/dealers or agents that participate in the distribution of
the Offered Securities may be deemed to be "underwriters" within the meaning of
the Securities Act and to any profit on the sale of such securities and any
discounts,
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commissions, concessions or other compensation received by such underwriter,
broker/dealer or agent may be deemed to be underwriting discounts and
commissions under the Securities Act.
The Offered Securities may be sold from time to time in one or more
transactions at fixed prices, at the prevailing market prices at the time of
sale, at varying prices determined at the time of sale or at negotiated prices.
The sale of the Offered Securities may be effectuated in transactions (which may
involve crosses or block transactions) (i) on any national securities exchange
or quotation service on which the Offered Securities may be listed or quoted at
the time of sale, (ii) in the over-the-counter market, (iii) in transactions
otherwise than on such exchanges or in the over-the-counter market, or (iv)
through the writing and exercise of options. At the time a particular offering
of the Offered Securities is made, a Prospectus Supplement, if required, will be
distributed which will set forth the aggregate amount of the type of Offered
Securities being offered and the terms of the Offering, including the name or
names of any underwriters, broker/dealers or agents, any discounts, commissions
and other terms constituting compensation from the Selling Holders, if any, and
any discounts, commissions or concessions allowed or reallowed to be paid to
broker/dealers, if any. To comply with the securities laws of certain
jurisdictions, if applicable, the Offered Securities will be offered or sold in
such jurisdictions only through registered or licensed brokers or dealers.
The Selling Holders will be subject to applicable provisions of the Exchange
Act and rules and regulations thereunder, which provisions may limit the timing
of purchases and sales of any of the Offered Securities by the Selling Holders.
The foregoing may affect the marketability of such securities.
Pursuant to the Registration Rights Agreement, the Company shall pay all
expenses of the registration of the Offered Securities including, without
limitation, commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts, selling commissions and transfer taxes, if any,
in the event of an underwritten offering of the Offered Securities.
The Selling Holders will be indemnified by the Company and the Trust,
jointly and severally against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith. The Company and the Trust will be indemnified by the
Selling Holders severally against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith.
LEGAL MATTERS
The validity of the Offered Securities and certain United States Federal
income taxation matters have been passed upon for the Company and the Trust by
Arter & Hadden, Dallas, Texas.
EXPERTS
The consolidated financial statements and schedule of Vanstar Corporation at
April 30, 1996 and 1995, and for the years then ended, the seven month period
ended April 30, 1994 and the year ended September 30, 1993, included in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
101
<PAGE>
VANSTAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report (Ernst & Young LLP)......................................................... F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Stockholders' Equity.......................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................................................. F-19
Consolidated Statements of Income........................................................................ F-20
Consolidated Statements of Cash Flows.................................................................... F-21
Notes to Consolidated Financial Statements............................................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Vanstar Corporation
We have audited the accompanying consolidated balance sheets of Vanstar
Corporation as of April 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
April 30, 1996 and 1995, the seven month period ended April 30, 1994 and the
year ended September 30, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vanstar
Corporation at April 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for years ended April 30, 1996 and 1995, the seven
month period ended April 30, 1994 and the year ended September 30, 1993, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
June 10, 1996
F-2
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash............................................ $ 14,498 $ 7,761
Receivables, net of allowance for doubtful
accounts of $14,812 and $12,326 at April 30,
1996 and 1995, respectively................... 298,484 261,308
Inventories..................................... 350,406 298,686
Deferred income taxes........................... 25,750 35,779
Prepaid expenses and other current assets....... 2,432 1,193
---------- ----------
Total current assets.......................... 691,570 604,727
Property and equipment, net....................... 23,183 19,832
Other assets, net................................. 48,899 39,296
Goodwill, net of accumulated amortization of
$3,453 and $1,726 at April 30, 1996 and 1995,
respectively.................................... 39,713 41,440
---------- ----------
$ 803,365 $ 705,295
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 305,374 $ 263,197
Accrued liabilities............................. 41,586 39,110
Deferred revenue................................ 27,109 26,883
Current maturities of long-term debt............ 1,759 7,685
---------- ----------
Total current liabilities..................... 375,828 336,875
Long-term debt, less current maturities........... 293,007 337,750
Other long-term liabilities....................... 7,477 8,081
Commitments and contingencies..................... -- --
Stockholders' equity:
Preferred stock................................. -- 153
Common stock:
Class A; $.001 par value: 100,000,000 shares
authorized, 40,475,144 shares issued and
outstanding at April 30, 1996; 50,000,000
shares authorized, 7,323,508 issued and
outstanding at April 30, 1995............... 40 7
Class B; $.001 par value; no shares
authorized, issued or outstanding at April
30, 1996; 18,800,000 shares authorized,
3,708,205 issued and outstanding at April
30, 1995.................................... -- 4
Additional paid-in capital...................... 115,097 24,768
Retained earnings (accumulated deficit) (since a
deficit elimination of $78,448 at April 30,
1994)......................................... 11,916 (2,343)
---------- ----------
Total stockholders' equity.................. 127,053 22,589
---------- ----------
$ 803,365 $ 705,295
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, SEVEN MONTHS YEAR ENDED
-------------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Products............................................. $ 1,578,298 $ 1,187,392 $ 490,576 $ 935,165
Services............................................. 226,515 198,000 95,938 164,648
------------ ------------ ------------- -------------
Total revenue...................................... 1,804,813 1,385,392 586,514 1,099,813
------------ ------------ ------------- -------------
Cost of revenue:
Products............................................. 1,430,404 1,073,879 437,316 824,514
Services............................................. 129,482 100,975 52,196 97,275
------------ ------------ ------------- -------------
Total cost of revenue............................ 1,559,886 1,174,854 489,512 921,789
------------ ------------ ------------- -------------
Gross margin........................................... 244,927 210,538 97,002 178,024
Selling, general and administrative expenses........... 201,880 182,411 97,436 181,320
------------ ------------ ------------- -------------
Operating income (loss)................................ 43,047 28,127 (434) (3,296)
Interest income...................................... 5,539 6,577 1,608 849
Interest expense..................................... (35,804) (32,555) (12,789) (23,045)
------------ ------------ ------------- -------------
Income (loss) from continuing operations before income
taxes................................................ 12,782 2,149 (11,615) (25,492)
Income tax benefit (provision)....................... (4,729) (881) 4,646 6,741
------------ ------------ ------------- -------------
Income (loss) from continuing operations............... 8,053 1,268 (6,969) (18,751)
Income from operations of discontinued businesses
(less income taxes of $3,693 in 1994 and $6,811 in
1993).............................................. -- -- 6,426 14,258
Gain on disposal of discontinued businesses (less
income taxes of $5,400 in 1996 and $10,706 in 1994
and $0 in 1993).................................... 9,194 -- 45,048 247
------------ ------------ ------------- -------------
Net income (loss)...................................... $ 17,247 $ 1,268 $ 44,505 $ (4,246)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Pro forma net income per share:
Continuing operations................................ $ 0.23 $ 0.04
Discontinued operations.............................. 0.27 --
------------ ------------
Total pro forma net income per share................... $ 0.50 $ 0.04
------------ ------------
------------ ------------
Shares used in pro forma per share calculation......... 34,250 32,486
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK A COMMON STOCK B
PREFERRED STOCK
-------------------- ------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- ----------- ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992.................. 9,766 $ 28,495 4,118 $ 4 3,708 $ 4
Issuance of Class A Common Stock............... -- -- 3,267 3 -- --
Amortization of deferred compensation.......... -- -- -- -- -- --
Issuance of warrants........................... -- -- -- -- -- --
Translation adjustments........................ -- -- -- -- -- --
Net loss....................................... -- -- -- -- -- --
Dividends...................................... -- -- -- -- -- --
--
--------- --------- ----------- --- -----------
Balance at September 30, 1993.................. 9,766 28,495 7,385 7 3,708 4
Conversion of Class A, C, and D Preferred Stock
and accrued dividends to Class F Preferred
Stock......................................... 5,543 (28,342) -- -- -- --
Payment on shareholder note receivable......... -- -- -- -- -- --
Issuance of Class A Common Stock............... -- -- 75 -- -- --
Translation adjustments........................ -- -- -- -- -- --
Sale of international businesses............... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
Dividends...................................... -- -- -- -- -- --
Quasi-reorganization:
Revaluation adjustments, net................. -- -- -- -- -- --
Transfer from accumulated deficit............ -- -- -- -- -- --
--
--------- --------- ----------- --- -----------
Balance at April 30, 1994...................... 15,309 153 7,460 7 3,708 4
Redemption of Class A Common Stock............. -- -- (154) -- -- --
Issuance of Class A Common Stock............... -- -- 17 -- -- --
Redemption of Class E Preferred Stock.......... -- -- -- -- -- --
Net income..................................... -- -- -- -- -- --
Dividends...................................... -- -- -- -- -- --
--
--------- --------- ----------- --- -----------
Balance at April 30, 1995...................... 15,309 153 7,323 7 3,708 4
Redemption of Class A Common Stock............. -- -- (103) -- -- --
Issuance of warrants -- -- -- -- -- --
Conversion of Class F Preferred Stock and
Senior Preferred Stock to Class A Common
Stock......................................... (15,309) (153) 15,309 15 -- --
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 -- --
Issuance of Class A Common Stock............... -- -- 9,216 9 -- --
Accrued Dividends Forgiven--Senior Preferred
Stock......................................... -- -- -- -- -- --
Exercise of Options............................ -- -- 26 -- -- --
Net income..................................... -- -- -- -- -- --
Dividends...................................... -- -- -- -- -- --
--
--------- --------- ----------- --- -----------
Balance at April 30, 1996...................... -- $ -- 40,475 $ 40 -- $ --
--
--
--------- --------- ----------- --- -----------
--------- --------- ----------- --- -----------
<CAPTION>
RETAINED
STOCKHOLDER ADDTL. EARNINGS
NOTE PAID-IN (ACCUM. TRANS
RECEIVABLE CAPTL. DEFICIT) ADJUST. TOTAL
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992.................. $ -- $ 84,758 $(112,434) $ (143) $ 684
Issuance of Class A Common Stock............... (1,846) 17,395 -- -- 15,552
Amortization of deferred compensation.......... -- 9 -- -- 9
Issuance of warrants........................... (154) 3,269 -- -- 3,115
Translation adjustments........................ -- -- -- 1,411 1,411
Net loss....................................... -- -- (4,246) -- (4,246)
Dividends...................................... -- -- (3,941) -- (3,941)
------------- --------- --------- --------- ---------
Balance at September 30, 1993.................. (2,000) 105,431 (120,621) 1,268 12,584
Conversion of Class A, C, and D Preferred Stock
and accrued dividends to Class F Preferred
Stock......................................... -- 28,342 -- -- --
Payment on shareholder note receivable......... 1,000 -- -- -- 1,000
Issuance of Class A Common Stock............... -- -- -- -- --
Translation adjustments........................ -- -- -- (86) (86)
Sale of international businesses............... -- -- -- (1,182) (1,182)
Net income..................................... -- -- 44,505 -- 44,505
Dividends...................................... -- -- (2,332) -- (2,332)
Quasi-reorganization:
Revaluation adjustments, net................. -- (29,692) -- -- (29,692)
Transfer from accumulated deficit............ -- (78,448) 78,448 -- --
------------- --------- --------- --------- ---------
Balance at April 30, 1994...................... (1,000) 25,633 -- -- 24,797
Redemption of Class A Common Stock............. 1,000 (1,000) -- -- --
Issuance of Class A Common Stock............... -- -- -- -- --
Redemption of Class E Preferred Stock.......... -- 135 -- -- 135
Net income..................................... -- -- 1,268 -- 1,268
Dividends...................................... -- -- (3,611) -- (3,611)
------------- --------- --------- --------- ---------
Balance at April 30, 1995...................... -- 24,768 (2,343) -- 22,589
Redemption of Class A Common Stock............. -- -- -- -- --
Issuance of warrants -- 500 -- -- 500
Conversion of Class F Preferred Stock and
Senior Preferred Stock to Class A Common
Stock......................................... -- 138 -- -- --
Conversion of Class B Common Stock to Class A
Common Stock.................................. -- -- -- -- --
Conversion of Warrants to Class A Common
Stock......................................... -- (5) -- -- --
Issuance of Class A Common Stock............... -- 83,382 -- -- 83,391
Accrued Dividends Forgiven--Senior Preferred
Stock......................................... -- 6,162 -- -- 6,162
Exercise of Options............................ -- 152 -- -- 152
Net income..................................... -- -- 17,247 -- 17,247
Dividends...................................... -- (2,988) -- -- (2,988)
------------- --------- --------- --------- ---------
Balance at April 30, 1996...................... $ -- $ 115,097 $ 11,916 $ -- $ 127,053
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, SEVEN MONTHS YEAR ENDED
---------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
---------- ---------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................... $ 17,247 $ 1,268 $ 44,505 $ (4,246)
Adjustments:
Depreciation and amortization............................. 9,775 9,997 9,248 17,883
Provision for receivables and investments................. 14,393 95 356 5,287
Gain on sale of building.................................. -- -- -- (1,398)
Gain on disposal of discontinued businesses............... (14,594) -- (55,754) (247)
Changes in operating assets and liabilities:
Receivables............................................. (51,193) (58,354) (19,092) 53,253
Inventories............................................. (51,720) (38,900) (86,044) 2,504
Prepaid expenses and otherassets........................ (2,462) (1,257) 1,505 (4,409)
Deferred income taxes................................... 10,029 (1,097) 9,710 (1,730)
Accounts payable........................................ 42,177 37,556 (19,679) (9,871)
Accrued and other liabilities........................... 4,865 1,070 (21,713) (34,890)
---------- ---------- ------------- -------------
Total adjustments..................................... (38,730) (50,890) (181,463) 26,382
---------- ---------- ------------- -------------
Net cash provided by (used in) operating activities......... (21,483) (49,622) (136,958) 22,136
Cash Flows from Investing Activities:
Sales of businesses....................................... 14,594 -- 78,401 3,097
Capital expenditures...................................... (15,583) (12,835) (3,099) (6,383)
Proceeds from sale of building............................ -- -- -- 2,939
Repayment of notes receivable............................. -- 9,722 6,213 6,327
---------- ---------- ------------- -------------
Net cash provided by (used in) investing activities......... (989) (3,113) 81,515 5,980
Cash Flows from Financing Activities:
Payments on long-term debt................................ (7,836) (12,342) (16,322) (10,120)
Borrowings under line of credit, net of payments.......... (46,999) 73,287 68,123 (33,032)
Issuance of common stock and warrants..................... 84,044 -- -- 14,740
Redemption of preferred stock and accrued dividends....... -- (4,654) -- --
Dividends paid............................................ -- (1,000) -- --
---------- ---------- ------------- -------------
Net cash provided by (used in) financing activities......... 29,209 55,291 51,801 (28,412)
Net increase (decrease) in cash............................. 6,737 2,556 (3,642) (296)
Cash at beginning of the period............................. 7,761 5,205 8,847 9,143
---------- ---------- ------------- -------------
Cash at end of the period................................... $ 14,498 $ 7,761 $ 5,205 $ 8,847
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid (received) during the period for:
Interest................................................ $ 38,761 $ 31,352 $ 13,094 $ 24,873
Income taxes, net of refunds.............................. 625 1,424 5 (349)
Non-cash investing activities:
Equipment acquired under capital leases................... 4,293 -- -- 699
Non-cash financing activities:
Payment of accrued dividends with common stock............ -- -- -- 3,462
Conversion of accrued dividends into a note payable....... -- 2,462 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and manage personal computer network infrastructures
primarily for Fortune 1000 companies and other large enterprises. The Company
provides customized, integrated solutions for its customers' network
infrastructure needs by combining a comprehensive offering of value-added
services with its expertise in sourcing and distributing PC's, network products,
computer peripherals and software from a variety of vendors. The consolidated
financial statements include the accounts of Vanstar Corporation and all
subsidiaries. All significant intercompany balances have been eliminated.
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
Products 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. Services
revenue is derived from value-added services, including services focused on the
server and communication segments of the PC network infrastructure, services
performed for the desktop and fees earned on a distribution services agreement.
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.
CHANGE OF COMPANY NAME AND FISCAL YEAR END
The Company changed its name from "ComputerLand Corporation" to "Vanstar
Corporation," effective March 21, 1994, in conjunction with the sale of its U.S.
franchise business, including the right to the "ComputerLand" name and trademark
within the United States.
The Company also changed its fiscal year end during fiscal 1994 from
September 30 to April 30. Accordingly, the Company's transition period ending
April 30, 1994 includes only seven months from October 1, 1993 to April 30,
1994.
FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
receivables, and accounts payable approximate the respective fair values due to
the short maturities of these instruments. The 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.
F-7
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<S> <C>
Furniture and equipment 3 to 5 years
Lesser of term of lease or useful
Leasehold improvements life
Building 25 years
</TABLE>
ACQUISITION ACCOUNTING
All acquisitions have been accounted for using the purchase method whereby
the purchase price, including liabilities assumed, is allocated based upon the
fair value of the tangible and intangible assets of the acquired entity. The
Company's consolidated statements of operations include the results of
operations of the acquired businesses subsequent to the purchase dates. Goodwill
represents the excess of cost over the net assets of acquired businesses and is
amortized using the straight-line method over twenty-five years.
The carrying amount of goodwill was adjusted to fair value at April 30, 1994
in connection with the Company's quasi-reorganization. Periodically, the Company
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
business. If there are indicated impairments, a write down is recorded to the
extent the carrying amount exceeds the fair value.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued two standards which
will be applicable to the Company but which the Company has not yet adopted:
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS to be Disposed of and
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The impairment standard is not expected to have a significant
impact on the Company. The Company has not yet determined which of the
acceptable approaches it will use under the stock compensation standard.
Adoption of certain approaches under the stock compensation standard could
result in noncash charges, which if made are not expected to be material. At a
minimum, the standard will require disclosures about the fair value of the
employee stock options.
2. DISCONTINUED OPERATIONS
The Company disposed of primarily all of its worldwide franchise business
during the seven months ended April 30, 1994 and the fiscal year ended September
30, 1993. Combined revenues of the franchise segment were $0.4 billion and $1.1
billion during the seven months ended April 30, 1994 and the fiscal year ended
September 30, 1993, respectively.
F-8
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS (CONTINUED)
U.S. FRANCHISE DIVISION
On January 31, 1994, pursuant to an asset purchase agreement, 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
FAB, a wholly-owned subsidiary of Merisel, Inc. ("Merisel"). The purchase price
was $80.2 million in cash plus additional consideration based upon the
cumulative volume of product sold during the two-year period commencing February
1, 1994. The Company recorded a gain on the sale of $32.5 million, net of
related disposition costs and taxes during the seven-month period ended April
30, 1994. At April 30, 1995, no additional consideration was recorded based on
the inability to determine the amount of additional consideration earned, if
any.
Concurrent with the sale, the Company entered into a distribution services
agreement with Merisel FAB. Pursuant to this agreement, the Company continues to
supply product and provide certain logistics and other support services to
Merisel FAB. The Company receives 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
provide that: the term of the distribution services agreement be extended
through April 30, 1997; the distribution fee be reduced retroactive to April 1,
1995; the additional consideration be fixed at $14.6 million; the maximum amount
of the extended credit be increased by $11.1 million, which will be reduced in
monthly installments from February 1996 through July 1997; and the original
amount of interest-bearing credit of $20.0 million be extended and reduced in
three equal monthly installments from May 15, 1997 through July 15, 1997.
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. As of April 30, 1996 the
Company reversed a portion of such provision (see Note 15--Subsequent Events).
INTERNATIONAL SUBSIDIARIES
On April 29, 1994, the Company sold several of its international
subsidiaries which operated franchise businesses primarily in Europe, resulting
in a net gain of approximately $12.6 million. On June 28, 1993, the Company sold
the assets of a subsidiary in New Zealand for approximately $2.2 million and
recognized a gain of $0.3 million.
3. QUASI-REORGANIZATION
Effective April 30, 1994, and in connection with the Company's decision to
dispose of its franchise business, the Company elected to adjust its balance
sheet in accordance with quasi-reorganization accounting principles. A
quasi-reorganization is an elective accounting procedure intended to restate
assets and liabilities to fair values and eliminate any deficit in retained
earnings. The accumulated deficit at April 30, 1994 of $78.4 million was
eliminated against additional paid-in capital. The adjustments to fair value
included $22.7 million of non-cash write-downs of goodwill and other intangible
assets and the write-down of $7.0 million of property, plant and equipment.
Management utilized the services of outside experts in determining the fair
values. The carrying values of all other assets and liabilities at April 30,
1994 were determined to approximate their fair values and no further adjustment
to the historical basis was
F-9
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. QUASI-REORGANIZATION (CONTINUED)
required. Management believes that those adjustments reflected the significant
changes in the evolution of the Company and provided a more appropriate basis to
report future operating results.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Inventory for resale.................................................. $ 348,419 $ 296,458
Less reserve for obsolete inventory................................... (12,640) (11,435)
---------- ----------
335,779 285,023
Spare parts (current)................................................. 14,627 13,663
---------- ----------
$ 350,406 $ 298,686
---------- ----------
---------- ----------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment................................................. $ 57,093 $ 46,609
Building and improvements............................................... 14,377 13,707
--------- ---------
71,470 60,316
--------- ---------
Less accumulated depreciation and amortization.......................... (48,287) (40,484)
--------- ---------
$ 23,183 $ 19,832
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization associated with property and equipment was
$7.7 million, $8.3 million, $7.3 million, and $13.9 million for the fiscal years
ended April 30, 1996 and 1995, the seven months ended April 30, 1994 and the
year ended September 30, 1993.
F-10
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Spare parts (non-current)............................................... $ 28,883 $ 27,324
Capitalized software, net............................................... 13,353 4,974
Deferred income taxes................................................... 5,593 5,593
Other................................................................... 1,070 1,405
--------- ---------
$ 48,899 $ 39,296
--------- ---------
--------- ---------
</TABLE>
Capitalized software represents the costs associated with development of
software for the Company's internal use. Such costs are capitalized in
accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
and are amortized over the remaining useful economic life of the software of up
to five years. Accumulated amortization at April 30, 1996 and 1995 was $0.3 and
$0.0 million, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Line of Credit........................................................ $ 289,072 $ 336,071
Note to stockholder, due January 1996............................... -- 4,578
9.75% note to stockholder............................................. -- 2,463
9.25% note secured by real property, payable in monthly installments
of $26 through April 2003........................................... 1,356 1,721
Other (including obligations under capital leases).................... 4,338 602
---------- ----------
Total Outstanding Debt................................................ $ 294,766 $ 345,435
Less current maturities............................................... (1,759) (7,685)
---------- ----------
$ 293,007 $ 337,750
---------- ----------
---------- ----------
</TABLE>
The line of credit consists of amounts borrowed under a financing agreement
with IBM Credit Corporation ("IBMCC"), an affiliate of one of the Company's
principal vendors. The line of credit is established for $450 million, is
renewable every six months, is secured by portions of the Company's inventory,
accounts receivable and certain other assets and is terminable by the Company or
IBMCC at anytime upon 90 days' written notice. In the event of such termination,
the outstanding borrowings are not due until the end of the term, currently
expiring on October 31, 1997. The financing agreement contains various terms and
covenants which require the Company to maintain certain levels of tangible net
worth and certain other financial restrictions. The financing agreement also
limits the Company's ability to pay cash dividends on its Common Stock. At April
30, 1996, the Company had $386 million outstanding under this facility of which
$97 million is included in accounts payable and $289 million is classified as
long-term debt. The interest rate was prime plus 2.0% through March 31, 1995,
and prime plus 1.06% from April 1,
F-11
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
1995 to March 31, 1996, prime plus 0.45% from April 1, 1996 to April 30, 1996
and prime minus 0.50% thereafter.
Aggregate maturities of long-term debt, excluding the line of credit, are
approximately $1.7 million, $1.7 million, $1.2 million, and $0.3 million,
respectively each of the succeeding four years, and $0.8 million thereafter.
8. CONCENTRATION OF CREDIT RISK
The Company purchases multi-vendor PC products for sale primarily to
end-users and to customers of Merisel FAB, and provides various PC-related
services. 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. During fiscal 1993 and the seven months ended April
30, 1994, no individual customer accounted for more than 10% of the Company's
total revenue. During fiscal year 1996 and 1995, Microsoft Corporation accounted
for 12.0%, and 10.8%, respectively, of the Company's total revenue.
9. LEASE COMMITMENTS
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 operating leases are subject to annual
escalation clauses ranging from two to five percent. Several facilities under
operating leases have been sublet. 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, 1996 are as
follows:
<TABLE>
<CAPTION>
MINIMUM LEASE SUBLEASE
PAYMENT INCOME
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
1997................................................................ $ 12,251 $ 820
1998................................................................ 7,714 348
1999................................................................ 4,234 43
2000................................................................ 1,158 --
2001................................................................ 540 --
Thereafter.......................................................... 939 --
------- -----------
$ 26,836 $ 1,211
------- -----------
------- -----------
</TABLE>
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, 1996 was
approximately $2.8 million, which has not reduced the amounts shown above.
Rental expense, under operating leases, charged to operations was $13.8
million, $14.2 million, $8.7 million and $15.2 million during fiscal year ended
April 30, 1996 and 1995, the seven month period ended April 30, 1994 and the
fiscal year ended 1993, respectively.
The cost of assets recorded under capital leases was $4.5 million and $3.3
million at April 30, 1996 and 1995, respectively. Accumulated amortization on
such assets was $0.5 million and $2.8 million at April 30, 1996 and 1995,
respectively. The present value of minimum lease payments under capital leases
as of April 30, 1996 was $4.1 million.
F-12
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On March 11, 1996, the Company completed an initial public offering selling
8,000,000 shares of its Common Stock. In connection with the initial public
offering, the Company granted to the Underwriters a 30-day option to purchase up
to an additional 2,215,770 shares of Common Stock solely to cover over-
allotments, if any. The Underwriters exercised their option to purchase
1,215,770 of such shares in April 1996.
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, 1996, 15,000,000 shares of undesignated Preferred Stock,
$0.01 par value are authorized; no shares of this newly authorized class have
been issued.
At April 30, 1996, the Company had 6,000,000 shares of Common Stock reserved
for future issuance for the Company's stock option and stock purchase plans and
29,800 shares of Common Stock reserved for future issuance upon the exercise of
options granted to certain of the Company's former franchisees.
STOCK OPTION PLANS
The Company has two 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 Plan was adopted in April 1993 and provides for the issuance of shares of
common stock, ISOs, NQSOs or SARs to highly compensated, managerial employees,
officers and directors. The exercise price of the ISOs under both 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, 1996, the total
number of shares of Common Stock for which options may be granted pursuant to
the 1988 and 1993 plans were 2,500,000 and 2,500,000, respectively. Under both
plans, options generally become exercisable ratably over a four or five year
period and expire in ten years. At April 30, 1996, options to purchase 1,403,034
shares were exercisable. At April 30, 1996, no SARs had been issued.
Effective as of May 1, 1995, the Company offered to all current employees
who held options, the right to exchange their options for new options that are
exercisable at a price of $3.00 per share. The new options are subject to a new
four-year vesting schedule commencing May 1, 1995. In connection with this
transaction, 1,164,505 options were exchanged.
F-13
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes option activity through April 30, 1996 under
both plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
OPTIONS EXERCISE AGGREGATE
AVAILABLE PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1992........................... 119,421 1,803,421 $0.18- 6.00 $ 9,627,876
Granted............................................... (61,800) 61,800 6.00 370,800
Canceled.............................................. 128,390 (128,390) 5.55- 6.00 (746,118)
Expired............................................... 101,876 (101,876) 5.55- 6.00 (572,499)
------------ ----------- ------------- -------------
Balance at September 30, 1993........................... 287,887 1,634,955 0.18- 6.00 8,680,059
Increase in authorized shares......................... 429,800 -- -- --
Granted............................................... (12,500) 12,500 6.00 75,000
Exercised............................................. -- (74,380) 0.18 (13,388)
Canceled.............................................. 22,324 (22,324) 5.55- 6.00 (130,536)
Expired............................................... 132,822 (132,822) 5.55- 6.00 (745,459)
------------ ----------- ------------- -------------
Balance at April 30, 1994............................... 860,333 1,417,929 0.18- 6.00 7,865,676
Granted............................................... (883,726) 883,726 6.00 5,302,356
Canceled.............................................. 69,964 (69,964) 5.55- 6.00 (417,775)
Expired............................................... 70,147 (70,147) 5.55- 6.00 (413,278)
------------ ----------- ------------- -------------
Balance at April 30, 1995............................... 116,718 2,161,544 0.18- 6.00 12,336,979
Increase in authorized shares......................... 2,677,158 -- -- --
Exercised............................................. -- (26,125) 3.00- 6.00 (152,250)
Granted............................................... (2,966,943) 2,966,943 3.00-10.00 12,896,829
Canceled.............................................. 1,229,630 (1,229,630) 3.00- 6.00 (7,139,304)
Expired............................................... 55,247 (55,247) 5.55- 6.00 (315,565)
------------ ----------- ------------- -------------
Balance at April 30, 1996............................... 1,111,810 3,817,485 $0.18-10.00 $ 17,626,689
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
</TABLE>
STOCK PURCHASE PLAN
On March 11, 1996, the Company adopted an employee purchase plan (the "Stock
Purchase Plan") allowing eligible employees to purchase shares of the Company's
Common Stock. The Stock Purchase Plan is intended to qualify as an "employee
stock purchase plan" under Section 423 of 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 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 day of the six month offer period or the last day of the six
month offer period. The initial offer period is from March 11, 1996 to August
31, 1996. At April 30, 1996, no shares were issued to employees participating in
the plan.
F-14
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS
The Company provides a savings plan under Section 401(k) of the Internal
Revenue 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 a
maximum allowed by the Internal Revenue Code. The Company will match 100% of the
employee's contributions up to $200 not to exceed the maximum of 1% of the
employee's eligible compensation. If the employee contributes more than $200 to
the plan, the Company will contribute 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. The amount charged to expense for the matching
contribution was $0.7 million, $0.7 million, $0.5 million, and $0.7 million for
the fiscal years ended April 30, 1996 and 1995, the seven month period ended
April 30, 1994, and the year ended September 30, 1993, respectively.
12. INCOME TAXES
The income tax benefit (provision) computed under Statement of Financial
Accounting Standards No. 109, consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30, SEVEN MONTHS FISCAL YEAR
--------------------- ENDED APRIL ENDED SEPTEMBER
1996 1995 30, 1994 30, 1993
---------- --------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal...................................................... $ -- $ -- $ (500) $ --
State........................................................ (100) (200) (500) --
Foreign...................................................... -- -- -- (260)
---------- --------- ------------- ---
(100) (200) (1,000) (260)
---------- --------- ------------- ---
Deferred:
Federal...................................................... (8,561) (562) (7,631) 190
State........................................................ (1,468) (119) (1,122) --
---------- --------- ------------- ---
(10,029) (681) (8,753) 190
---------- --------- ------------- ---
Total gross margin....................................... $ (10,129) $ (881) $ (9,753) $ (70)
---------- --------- ------------- ---
---------- --------- ------------- ---
</TABLE>
The income tax benefit (provision) is allocated between discontinued and
continuing operations as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
--------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
---------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Provision allocated to operations of discontinued businesses
and income on disposal of discontinued business.............. $ (5,400) $ -- $ (14,399) $ (6,811)
---------- --------- ------------- -------------
---------- --------- ------------- -------------
Income tax benefit (provision) allocated to continuing
operations................................................... $ (4,729) $ (881) $ 4,646 $ 6,741
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
F-15
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Significant components of deferred tax liabilities and assets consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Capital leases...................................................... $ -- $ 91
Other............................................................... -- 106
---------- ----------
Total deferred tax liabilities.................................... -- 197
---------- ----------
Deferred tax assets:
Reserves............................................................ 8,220 9,504
Inventory reserves.................................................. 6,446 9,441
Other expenses, not currently deductible............................ 2,751 6,454
Net operating loss carryforward..................................... 13,926 10,381
Other............................................................... -- 5,789
---------- ----------
Total deferred tax assets......................................... 31,343 41,569
---------- ----------
Total net deferred tax assets......................................... $ 31,343 $ 41,372
---------- ----------
---------- ----------
</TABLE>
The net operating loss carryforwards listed above expire in the years 2000
through 2010.
Realization of the total net deferred tax assets is dependent on generating
future taxable income. The full realization of the $31.3 million of deferred tax
assets carried at April 30, 1996 is dependent upon the Company achieving future
pretax earnings, prior to the expiration of the net operating loss
carryforwards, of $84.7 million. Although realization is not assured, Management
believes that sufficient taxable income will be generated through operations to
realize the net deferred tax assets. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
Income before income taxes from foreign operations was $0.0 million, $0.0
million, $0.9 million and, $3.4 million for fiscal years ended April 30, 1996
and 1995, the seven months ended April 30, 1994, and the fiscal year ended
September 30, 1993, respectively.
A reconciliation of the U.S. statutory income tax rate and the effective
rate of the income tax benefit (provision) allocated to continuing operations is
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
-------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
--------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Statutory tax rate at 35% (34% for 1993)........................ $ (4,473) $ (752) $ 4,065 $ 8,667
State income taxes, net of federal benefit...................... (536) (108) 210 725
Losses not benefited............................................ -- -- -- (2,736)
Other........................................................... 280 (21) 371 85
--------- --------- ------ ------
$ (4,729) $ (881) $ 4,646 $ 6,741
--------- --------- ------ ------
--------- --------- ------ ------
</TABLE>
F-16
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Pro forma net income per share and shares used in per share calculation for
fiscal year 1996 and 1995 have been presented on the consolidated statements of
income as if the conversion of the Company's preferred stock and warrants had
occurred at the later of the beginning of fiscal year 1995 or the issuance date.
Both pro forma and historical income (loss) per share is 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
on the preferred stock using the if-converted method and on the outstanding
options using the treasury stock method. During the fiscal years ended 1995 and
1993 the effect upon the historical income (loss) per share of common stock
equivalents was antidilutive and is therefore excluded from the calculations.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock equivalents also include amounts computed on options and warrants
issued within twelve months of the filing date as if they were outstanding for
all periods presented using the treasury stock method and the initial public
offering price.
The following is a summary of the historical income (loss) per common and
common equivalent share and historical shares used in per share calculation:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
-------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Historical income (loss) per share:
Continuing operations...................................... $ 0.27 $ (0.17) $ (0.24 ) $ (1.89 )
Discontinued operations.................................... 0.30 -- 1.76 1.21
--------- --------- ------------- -------------
Total historical income (loss) per share..................... $ 0.57 $ (0.17) $ 1.52 $ (0.68 )
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Weighted average number of shares
(in thousands):
Common stock............................................... 14,247 11,040 11,168 9,282
Common stock equivalents................................... 15,974 2,671 18,053 2,671
--------- --------- ------------- -------------
Historical shares used in per share calculation.............. 30,221 13,711 29,221 11,953
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
14. LITIGATION AND CONTINGENCIES
Various legal actions arising in the normal course of business have been
brought against the Company and certain of its subsidiaries. Management believes
that the ultimate resolution of these actions will not have a material adverse
effect on the Company's financial position or results of operations, taken as a
whole.
15. SUBSEQUENT EVENTS
Effective May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Dataflex Corporation and of Dataflex's wholly-owned subsidiary, Dataflex
Southwest Corporation. The assets acquired and liabilities assumed comprise
substantially all of the assets and liabilities previously associated with the
business operations of Dataflex known as the Dataflex Western Region and
Dataflex Southwest Region. The two Dataflex regions offer PC product
F-17
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
distribution, service and support in the states of Arizona, California,
Colorado, New Mexico, Nevada and Utah and reported revenues of approximately
$145 million for the fiscal year ended March 31, 1996. The purchase price of the
assets and businesses acquired from Dataflex was approximately $42.0 million,
subject to certain post-closing adjustments. Of this amount, the Company paid
approximately $37.0 million in cash on May 29, 1996, with the remainder due
following the completion of an audit of the assets acquired and the liabilities
assumed as of May 31, 1996 and the completion of certain other post closing
matters.
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 of the agreement, 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 June 5, 1996, the Company entered into an agreement to acquire Mentor
Technologies LTD, ("Mentor"), an Ohio limited partnership providing information
technology training and education. Mentor reported revenues of approximately
$5.5 million for the year ended December 31, 1995. The Company anticipates
accounting for the acquisition as a "pooling of interests" as defined by
Accounting Principals Board Opinion No. 16., BUSINESS COMBINATIONS. Consummation
of the transaction is subject to certain closing conditions and compliance with
applicable law.
F-18
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1996
----------- ----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash................................................................................... $ 12,090 $ 14,498
Receivables, net of allowance for doubtful accounts of $10,386 at October 31, 1996, and
$14,812 at April 30, 1996............................................................ 302,024 298,484
Inventories............................................................................ 380,976 350,406
Deferred income taxes.................................................................. 13,511 25,750
Prepaid expenses and other current assets.............................................. 6,933 2,432
----------- ----------
Total current assets................................................................. 715,534 691,570
Property and equipment, net.............................................................. 25,226 23,183
Other assets, net........................................................................ 50,340 48,899
Goodwill, net of accumulated amortization of $4,541 at October 31, 1996, and $3,453 at
April 30, 1996......................................................................... 52,158 39,713
----------- ----------
$ 843,258 $ 803,365
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 299,038 $ 305,374
Accrued liabilities.................................................................... 41,679 41,586
Deferred revenue....................................................................... 25,469 27,109
Current maturities of long-term debt................................................... 2,365 1,759
Short-term borrowings.................................................................. 115,625 --
----------- ----------
Total current liabilities............................................................ 484,176 375,828
Long-term debt, less current maturities.................................................. 3,337 293,007
Other long-term liabilities.............................................................. 5,835 7,477
Commitments and contingencies............................................................ -- --
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary
trust holding solely convertible subordinated debt securities of the Company (1)....... 194,561 --
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares authorized, 41,465,250 shares issued
and outstanding at October 31, 1996, 40,475,144 shares issued and outstanding at
April 30, 1996....................................................................... 41 40
Additional paid-in capital............................................................. 122,552 115,097
Retained earnings...................................................................... 32,756 11,916
----------- ----------
Total stockholders' equity........................................................... 155,349 127,053
----------- ----------
$ 843,258 $ 803,365
----------- ----------
----------- ----------
</TABLE>
- ------------------------
(1) The sole asset of the Trust is $207,474,200 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2016.
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER
31,
------------------------
1996 1995
------------ ----------
<S> <C> <C>
(UNAUDITED)
Revenue:
Product............................................................................... $ 953,122 $ 763,113
Services.............................................................................. 149,701 109,184
------------ ----------
Total revenue....................................................................... 1,102,823 872,297
Cost of revenue:
Product............................................................................... 858,209 692,316
Services.............................................................................. 85,211 58,734
------------ ----------
Total cost of revenue............................................................... 943,420 751,050
------------ ----------
Gross margin............................................................................ 159,403 121,247
Selling, general and administrative expenses............................................ 116,237 93,134
------------ ----------
Operating income........................................................................ 43,166 28,113
Interest income....................................................................... 1,776 2,900
Interest expense...................................................................... (10,864) (17,894)
------------ ----------
Income before income taxes and distributions on preferred securities of trust........... 34,078 13,119
Income tax provision.................................................................. (12,609) (4,854)
Distributions on convertible preferred securities of trust, net of tax (See Note 3)... (629) --
------------ ----------
Net income.............................................................................. $ 20,840 $ 8,265
------------ ----------
------------ ----------
Primary and fully diluted earnings per share (pro forma prior to March 11, 1996--See
Note 2)............................................................................... $ 0.49 $ 0.25
------------ ----------
------------ ----------
Shares used in per share calculation.................................................... 42,440 33,029
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 20,840 $ 8,265
Adjustments:
Depreciation and amortization................... 7,821 4,722
Change in provision for doubtful accounts....... (2,707) 1,294
Changes in operating assets and liabilities:
Receivables................................... 25,002 3,031
Inventories................................... (24,114) (48,510)
Prepaid expenses and other assets............. (4,033) (265)
Deferred income taxes......................... 12,239 4,754
Accounts payable.............................. (13,682) 11,334
Accrued and other liabilities................. (5,919) 1,842
------------ ------------
Total adjustments........................... (5,393) (21,798)
------------ ------------
Net cash provided by (used in) operating
activities........................................ 15,447 (13,533)
Cash flows from investing activities:
Repayment of notes receivable..................... -- 4,496
Capital expenditures.............................. (7,159) (9,578)
Proceeds from sale of building.................... 3,125 --
Purchase of business, net of cash acquired........ (35,633) --
------------ ------------
Net cash used in investing activities............... (39,667) (5,082)
Cash flows from financing activities:
Payments on long-term debt........................ (3,264) (384)
Borrowings under line of credit, net of
payments........................................ (173,581) 15,174
Proceeds from issuance of convertible preferred
securities of trust, net........................ 194,561 --
Issuance of common stock and warrants............. 4,096 500
------------ ------------
Net cash provided by financing activities........... 21,812 15,290
------------ ------------
Net decrease in cash................................ (2,408) (3,325)
Cash at beginning of the period................... 14,498 7,761
------------ ------------
Cash at end of the period........................... $ 12,090 $ 4,436
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The financial statements for Vanstar Corporation (the "Company") for the six
months ended October 31, 1996 and October 31, 1995 are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1996. The results of
operations for the six months ended October 31, 1996 are not necessarily
indicative of the results to be expected for the entire fiscal year.
2. EARNINGS PER SHARE
Earnings per share and shares used in per share calculation for periods
prior to March 11, 1996, the date of the Company's initial public offering, have
been presented on the consolidated statements of income as if the conversion of
the Company's preferred stock and warrants had occurred at the later of the
beginning of the period or the issuance date.
Primary and fully diluted earnings per share is computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents are computed for the
Company's outstanding options using the treasury stock method. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common stock
equivalents also include amounts computed on options and warrants issued during
the twelve months immediately preceding the date of the initial filing of the
Company's Registration Statement on Form S-1 relating to the Company's initial
public offering as if they were outstanding for all periods prior to the closing
on March 11, 1996 (using the treasury stock method and the initial public
offering price of $10.00).
3.COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY
TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT SECURITIES OF THE COMPANY
On October 2, 1996, Vanstar Financing Trust, a Delaware statutory business
trust (the "Trust") issued and sold 3,500,000 6 3/4% Trust Convertible Preferred
Securities (the "Convertible Preferred Securities") in transactions exempt or
excluded from the registration requirements of the Securities Act of 1933, as
amended. On October 28, 1996, an additional 525,000 of the Convertible Preferred
Securities were sold to the same initial purchasers pursuant to the exercise of
an over-allotment option granted to such purchasers in connection with the
October 2, 1996 transaction. The Company owns all of the common securities
issued by the Trust. The sole asset of the Trust is $207,474,200 aggregate
principal amount of the Company's 6 3/4% Subordinated Debentures due 2016 (the
"Debentures").
The Convertible Preferred Securities sold for and have a liquidation value
of $50 per security and are convertible at any time at the option of the holder
into shares of the Company's Common Stock at a conversion rate of 1.739 shares
for each Convertible Preferred Security (equivalent to a conversion price of
$28.75 per share of the Company's Common Stock), subject to adjustment in
certain circumstances. Distributions on the Convertible Preferred Securities
accrue at an annual rate of 6 3/4% of the liquidation value of $50 per
Convertible Preferred Security and are included in "Distributions on convertible
preferred securities of trust, net of tax" in the consolidated statements of
income. The proceeds of the October
F-22
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3.COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY
TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT SECURITIES OF THE COMPANY
(CONTINUED)
issuances, which totaled $194.5 million (net of initial purchasers' discounts
and estimated offering expenses totaling $6.7 million) are included in
"Company-obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible subordinated debt securities of the
Company" in the consolidated balance sheet. The Company guaranteed, on a
subordinated basis (the "Guarantee"), payment of (i) the distributions on the
Convertible Preferred Securities, (ii) the amount payable upon redemption of the
Convertible Preferred Securities, and (iii) the liquidation amount of the
Convertible Preferred Securities. The Guarantee will apply to payment of
distributions, redemptions and liquidations if and only to the extent the Trust
has funds sufficient to make such payments. Considered together, the Guarantee
provides a full and unconditional guarantee by the Company of the Convertible
Preferred Securities.
The Debentures bear interest at 6 3/4% per annum payable quarterly on
January 1, April 1, July 1 and October 1. The Debentures are redeemable by the
Company, in whole or in part, on or after October 5, 1999 at designated
redemption prices. If the Company redeems the Debentures, the Trust must redeem
the Convertible Preferred Securities on a pro rata basis having an aggregate
liquidation value equal to the aggregate principal amount of the Debentures
redeemed. The Debentures and related income statement effects are eliminated in
the Company's consolidated financial statements. The Company used the proceeds
from the issuance of the Debentures to repay a portion of amounts owed under its
Financing Program Agreement with IBM Credit Corporation ("IBMCC").
4. COMMITMENTS AND CONTINGENCIES
Various legal actions arising in the normal course of business have been
brought against the Company and certain of its subsidiaries. Management believes
that the ultimate resolution of these actions will not have a material adverse
effect on the Company's financial position or results of operations, taken as a
whole.
F-23
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE TRUST OR ANY OF THEIR AGENTS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THE TRUST SINCE SUCH DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information.......................... 4
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995..... 4
Summary........................................ 5
Risk Factors................................... 13
The Company.................................... 25
Vanstar Financing Trust........................ 25
Accounting Treatment........................... 26
Market Prices and Dividend Policy.............. 27
Capitalization................................. 28
Selected Consolidated Financial Data........... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 30
Business....................................... 40
Recent Developments............................ 49
Management..................................... 51
Security Ownership of Principal Stockholders
and Management............................... 60
Certain Transactions........................... 62
Description of the Preferred Securities........ 63
Description of the Guarantee................... 81
Description of the Convertible Debentures...... 84
Effect of Obligations under the Convertible
Debentures and the Guarantee................. 93
Description of Capital Stock................... 94
Certain United States Federal Income Tax
Considerations............................... 96
Certain ERISA Considerations................... 99
Selling Holders................................ 100
Plan of Distribution........................... 100
Legal Matters.................................. 101
Experts........................................ 101
Index to Consolidated Financial Statements..... F-1
</TABLE>
VANSTAR FINANCING TRUST
4,025,000
6 3/4% TRUST CONVERTIBLE PREFERRED SECURITIES
(LIQUIDATION AMOUNT $50 PER PREFERRED SECURITY)
GUARANTEED TO THE EXTENT SET FORTH HEREIN BY,
AND CONVERTIBLE INTO COMMON STOCK OF,
VANSTAR CORPORATION
[LOGO]
Dated , 1997.
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Securities and Exchange Commission and NASD registration fees.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee......................... $ 67,694
NASD filing fee....................................................... 22,840
Accounting fees and expenses.......................................... 75,000
Legal fees and expenses (exclusive of Blue Sky)....................... 300,000
Printing and engraving expenses....................................... 125,000
Transfer agent and Trustees fees and expenses......................... 37,500
Blue Sky fees and expenses............................................ 7,500
Rating Agency Fees.................................................... 112,500
Miscellaneous......................................................... 10,000
---------
Total............................................................... $ 758,034
---------
---------
</TABLE>
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article VI of the Registrant's Restated Certificate of Incorporation
(the "Certificate of Incorporation") eliminates the liability of the
Registrant's directors to the Registrant or its stockholders, except for
liabilities related to breach of duty of loyalty, actions not in good faith and
certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Registrant of
its directors and officers. In addition, Article IX, Section 1 of the
Registrant's Restated By-Laws (the "By-laws") requires the Registrant to
indemnify any current or former director or officer to the fullest extent
permitted by the DGCL. In addition, the Registrant has entered into indemnity
agreements with its directors which obligate the Registrant to indemnify such
directors to the fullest extent permitted by the DGCL. The Registrant has also
obtained officers and directors liability insurance which insures against
liabilities that officers and directors of the Registrant may incur in such
capacities.
The Declaration provides for full indemnification of any Regular Trustee,
the Delaware Trustee and the Property Trustee, any affiliate of any such
Trustee, any officers, directors, shareholders, members, partners, employees,
representatives or agents of any such Trustee and any officer, employee or agent
of the Trust or its affiliates (each an "Indemnified Person") by the Company in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Trust) by reason of such Indemnified Person's status
as an Indemnified Person against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Trust, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The Declaration
also provides that the Company shall indemnify, to the fullest extent permitted
by law, any Indemnified Person in connection with any threatened, pending or
completed action or suit by or in the right of the Trust by reason of such
Indemnified Person's status as an Indemnified Person against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Trust and except that no such indemnification shall be made in respect of
any claim, issue or matter as to which such Indemnified Person shall have been
adjudged to be liable to the Trust unless the appropriate court shall determine
upon
II-1
<PAGE>
application that, despite the adjudication of liability, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper. Further, the Declaration provides that expenses (including legal
fees) incurred by an Indemnified Person in defending any such claim, demand,
action, suit or proceeding, shall from time to time be advanced by the Company
prior to the final disposition of such claim, demand, action, suit or proceeding
upon receipt by or an undertaking by or on behalf of the Indemnified Person to
repay such amount if it shall be determined that the Indemnified Person is not
entitled to be indemnified for the underlying cause of action as authorized by
the Declaration.
The Selling Holders will be indemnified by the Company and the Trust,
jointly and severally, against certain civil liabilities, including certain
liabilities under the Securities Act or will be entitled to contribution in
connection therewith. The Company and the Trust will be indemnified by the
Selling Holders severally against certain civil liabilities, including certain
liabilities under the Securities Act or will be entitled to contribution in
connection therewith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 31, 1993, the Company has sold the following unregistered
securities:
1. In May 1995, the Company issued and sold a warrant to purchase 2,000,000
shares of Common Stock at an exercise price of $5.00 per share for an aggregate
purchase price of $500,000. In connection with the Company's initial public
offering, the holder of that portion of such warrant representing the right to
acquire 1,945,739 shares of Common Stock has foregone the right to acquire
523,096 shares under such warrant and has waived certain registration rights in
exchange for the Company's issuing 1,562,643 shares of Common Stock to such
holder.
2. In December 1995 and February 1996, the Company issued an aggregate of
25,225 shares of Common Stock to former employees who had exercised options for
an aggregate exercise price of $149,650.
3. In October 1996, the Company issued $180,412,350 of its 6 3/4%
Convertible Subordinated Debentures Due 2016 to the Trust in connection with the
Original Offering.
4. In November 1996, the Company issued $27,061,850 of its 6 3/4%
Convertible Subordinated Debentures Due 2016 to the Trust in connection with the
over-allotment option granted the Initial Purchasers as part of the Original
Offering.
5. In December 1996, the Company issued 952,491 shares of Company Common
Stock in connection with the CDS Merger.
6. In January 1997, the Company issued 180,000 shares of Company Common
Stock in connection with the acquisition of assets from DCT.
7. The Company has granted outstanding options to purchase up to an
aggregate of 100,505 shares of Company Common Stock at a weighted average
exercise price of approximately $1.65 per share on an unregistered basis since
December 31, 1993.
All transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act contained in
Section 4(2) of the Securities Act or Rule 701 promulgated thereunder. In
connection with each of these transactions, the securities were sold to a
limited number of persons, such persons were provided access to all relevant
information regarding the Company and/or represented to the Company that they
were "sophisticated" investors, and such persons represented to the Company that
the securities were purchased for investment purposes only and with no view
toward distribution.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following is a list of all exhibits filed as part of this Registration
Statement on Form S-1, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant (1)
*4.1 Certificate of Trust of Vanstar Financing Trust
*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
*4.3 Indenture dated as of October 2, 1996 between Vanstar Corporation as issuer and Wilmington Trust
Company as trustee
4.4 Form of 6 3/4% Preferred Securities (included as Exhibit A-1 to Exhibit 4.2 above)
4.5 Form of 6 3/4% Convertible Subordinated Debentures Due 2016 (included as Exhibit B to Exhibit 4.2
above)
*4.6 Preferred Securities Guarantee Agreement dated October 2, 1996 between Vanstar Corporation as
guarantor and Wilmington Trust Company as preferred guarantee trustee
*5.1 Opinion of Arter & Hadden (including the consent of such firm) as to the legality of the Vanstar
Corporation Common Stock, 6 3/4% Convertible Subordinated Debentures Due 2016, 6 3/4% Preferred
Securities and the Preferred Securities Guarantee being registered hereby and as to certain tax
matters
*8.1 Opinion of Arter & Hadden (including the consent of such firm) as to certain tax matters (included in
Exhibit 5.1 above)
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 Distribution and Services Agreement dated January 31, 1994, between the Registrant and Merisel FAB,
Inc., as amended (1)
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 Real Estate Mortgage dated as of April 6, 1978, entered into between Danners, Inc. and New England
Mutual Life Insurance Company and the subsequent Contract for Purchase of Real Estate/Offer to
Purchase Real Estate dated as of April 26, 1991, entered into between the Registrant and Cheyenne
Plaza Associates (1)
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)
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)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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 Asset Purchase Agreement with Dataflex Corporation, Dataflex Southwest Corporation (2)
10.13 Agreement with Donaldson Lufkin & Jenrette Securities Corporation (3)
10.14 Agreement for Purchase and Sale of Property dated June 3, 1996 entered into between the Registrant and
Duke Realty Limited Partnership (4) (incorporated by reference to Exhibit 10.13)
10.15 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.14)
10.16 Lease Agreement dated as of May 30, 1996 entered into between the Registrant and Dugan Realty, L.L.C.
(4) (incorporated by reference to Exhibit 10.15)
10.17 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.16)
10.18 Lease Amendment dated May 15, 1996 entered into between the Registrant and Rosewood Associates (4)
(incorporated by reference to Exhibit 10.17)
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 Registration Rights Agreement dated October 2, 1996 by and among the Registrant and the Initial
Purchasers
***10.25 1996 Stock Option/Stock Issuance Plan, as amended
10.26 Amendment No. 5 to Second Amended and Restated Financing Program Agreement, dated September 25, 1996
between the Registrant and IBMCC (5)
10.27 Amendment No. 6 to Second Amended and Restated Financing Program Agreement, dated December 20, 1996
between the Registrant and IBMCC (6)
10.28 Receivables Purchase Agreement, dated as of December 20, 1996, among Vanstar Finance Co., as seller,
the Registrant as servicer, Pooled Accounts Receivable Capital Corporation, as purchaser and Nesbitt
Burns Securities, Inc., as agent (incorporated by reference to Exhibit 10.1) (6)
10.29 Purchase and Contribution Agreement, dated as of December 20, 1996, between the Registrant and Vanstar
Finance Co. (incorporated by reference to Exhibit 10.2) (6)
10.30 Intercreditor Agreement, dated as of December 20, 1996, among PAR Accounts Receivable Capital
Corporation, the Registrant, Vanstar Finance Co., and Nesbitt Burns Securities, Inc. (incorporated
by reference to Exhbit 10.4) (6)
*11.1 Statement re Calculation of Earnings Per Share
***12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
***21.1 List of subsidiaries
*23.1 Consent of Arter & Hadden (previously included as part of its opinion filed as Exhibit 5.1 hereto)
***23.2 Consent of Ernst & Young LLP, independent auditors
*24.1 Power of Attorney
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
*25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), of Wilmington Trust Company as Trustee under the Indenture relating to
the 6 3/4% Convertible Subordinated Debentures Due 2016
*25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of Wilmington Trust Company as
Property Trustee under the Amended and Restated Declaration of Trust
*25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of Wilmington Trust Company as
Preferred Guarantee Trustee under the Preferred Securities Guarantee Agreement
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibits with the corresponding number (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 2.1 to the Registrant's Current Report
on Form 8-K dated June 14, 1996.
(4) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with Registrant's Annual Report on Form 10-K for
the fiscal year ended April 30, 1996.
(5) 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.
(6) Incorporated by reference to Exhibits with the number indicated filed with
the Registrant's Current Report on Form 8-K dated December 26, 1996 and
filed with the Commission on January 10, 1997.
* Previously filed.
** Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 under the Securities Act.
*** Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this Registration
Statement:
II Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
ITEM 17. UNDERTAKINGS.
(a) RULE 415 OFFERING. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
II-5
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(h) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising out of the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by each director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit it to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-6
<PAGE>
COMPANY SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pleasanton, State of
California, on the 10th day of January 1997.
VANSTAR CORPORATION
By: /s/ WILLIAM Y. TAUSCHER
-----------------------------------------
William Y. Tauscher
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 10th day of January, 1997, by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ WILLIAM Y. TAUSCHER
------------------------------------------- Chairman of the Board, Chief Executive Officer and
William Y. Tauscher Director (PRINCIPAL EXECUTIVE OFFICER)
/s/ JEFFREY S. RUBIN*
------------------------------------------- Vice Chairman, Chief Financial Officer and Director
Jeffrey S. Rubin (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ JAY S. AMATO*
------------------------------------------- President, Chief Operating Officer and Director
Jay S. Amato
/s/ JOHN W. AMERMAN*
------------------------------------------- Director
John W. Amerman
/s/ RICHARD H. BARD*
------------------------------------------- Director
Richard H. Bard
/s/ STEPHEN W. FILLO*
------------------------------------------- Director
Stephen W. Fillo
/s/ STEWART K. P. GROSS*
------------------------------------------- Director
Stewart K. P. Gross
/s/ WILLIAM H. JANEWAY*
------------------------------------------- Director
William H. Janeway
/s/ JOHN R. OLTMAN*
------------------------------------------- Director
John R. Oltman
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ JOHN L. VOGELSTEIN*
------------------------------------------- Director
John L. Vogelstein
/s/ JOSH S. WESTON*
------------------------------------------- Director
Josh S. Weston
*By: /S/ H. CHRISTOPHER COVINGTON
--------------------------------------
H. Christopher Covington
AGENT AND ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
TRUST SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Vanstar
Financing Trust has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Pleasanton,
State of California, on the 10th day of January, 1997.
VANSTAR FINANCING TRUST
By: /s/ LESLIE J. ALVAREZ
-----------------------------------------
Leslie J. Alvarez,
TRUSTEE
By: /s/ JOHN J. DUNICAN, JR.
-----------------------------------------
John J. Dunican, Jr.,
TRUSTEE
II-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated balance sheets of Vanstar Corporation as of
April 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended April 30, 1996 and 1995,
the seven month period ended April 30, 1994 and the year ended September 30,
1993, and have issued our report thereon dated June 10, 1996 (included elsewhere
in this Registration Statement on Form S-1). Our audits also included the
financial statement schedule of Vanstar Corporation listed in item 16(b). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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
San Jose, California
June 10, 1996
S-1
<PAGE>
VANSTAR CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND WRITE-OFFS/ BALANCE AT
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD EXPENSES OTHER END OF PERIOD
- ------------------------------------------------------ ------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended September 30, 1993........................ $ 23,533 $ 5,287 $ 12,621 $ 16,199
Seven months ended April 30, 1994................... 16,199 356 2,457 14,098
Year ended April 30, 1995........................... 14,098 95 1,867 12,326
Year ended April 30, 1996........................... 12,326 $ 14,393* $ 8,407** 18,312
<CAPTION>
INVENTORY RESERVES
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended September 30, 1993........................ $ 23,698 $ 6,760 $ 17,564 $ 12,894
Seven months ended April 30, 1994................... 12,894 1,213 2,660 11,447
Year ended April 30, 1995........................... 11,447 5,400 5,412 11,435
Year ended April 30, 1996........................... 11,435 3,854 2,649 12,640
</TABLE>
- ------------------------
* 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 Notes 2 and 15 to the Notes to Consolidated Financial Statements).
** Includes the write-off of $4.4 million of the extended interest-bearing
credit due from Merisel FAB.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant (1)
*4.1 Certificate of Trust of Vanstar Financing Trust
*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
*4.3 Indenture dated as of October 2, 1996 between Vanstar Corporation as issuer and Wilmington Trust
Company as trustee
4.4 Form of 6 3/4% Preferred Securities (included as Exhibit A-1 to Exhibit 4.2 above)
4.5 Form of 6 3/4% Convertible Subordinated Debentures Due 2016 (included as Exhibit B to Exhibit 4.2
above)
*4.6 Preferred Securities Guarantee Agreement dated October 2, 1996 between Vanstar Corporation as
guarantor and Wilmington Trust Company as preferred guarantee trustee
*5.1 Opinion of Arter & Hadden (including the consent of such firm) as to the legality of the Vanstar
Corporation Common Stock, 6 3/4% Convertible Subordinated Debentures Due 2016, 6 3/4% Preferred
Securities and the Preferred Securities Guarantee being registered hereby and as to certain tax
matters
*8.1 Opinion of Arter & Hadden (including the consent of such firm) as to certain tax matters (included in
Exhibit 5.1 above)
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 Distribution and Services Agreement dated January 31, 1994, between the Registrant and Merisel FAB,
Inc., as amended (1)
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 Real Estate Mortgage dated as of April 6, 1978, entered into between Danners, Inc. and New England
Mutual Life Insurance Company and the subsequent Contract for Purchase of Real Estate/Offer to
Purchase Real Estate dated as of April 26, 1991, entered into between the Registrant and Cheyenne
Plaza Associates (1)
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)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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 Asset Purchase Agreement with Dataflex Corporation, Dataflex Southwest Corporation (2)
10.13 Agreement with Donaldson Lufkin & Jenrette Securities Corporation (3)
10.14 Agreement for Purchase and Sale of Property dated June 3, 1996 entered into between the Registrant and
Duke Realty Limited Partnership (4) (incorporated by reference to Exhibit 10.13)
10.15 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.14)
10.16 Lease Agreement dated as of May 30, 1996 entered into between the Registrant and Dugan Realty, L.L.C.
(4) (incorporated by reference to Exhibit 10.15)
10.17 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.16)
10.18 Lease Amendment dated May 15, 1996 entered into between the Registrant and Rosewood Associates (4)
(incorporated by reference to Exhibit 10.17)
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 Registration Rights Agreement dated October 2, 1996 by and among the Registrant and the Initial
Purchasers
***10.25 1996 Stock Option/Stock Issuance Plan, as amended
10.26 Amendment No. 5 to Second Amended and Restated Financing Program Agreement, dated September 25, 1996
between the Registrant and IBMCC (5)
10.27 Amendment No. 6 to Second Amended and Restated Financing Program Agreement, dated December 20, 1996
between the Registrant and IBMCC (6)
10.28 Receivables Purchase Agreement, dated as of December 20, 1996, among Vanstar Finance Co., as seller,
the Registrant as servicer, Pooled Accounts Receivable Capital Corporation, as purchaser and Nesbitt
Burns Securities, Inc., as agent (incorporated by reference to Exhibit 10.1) (6)
10.29 Purchase and Contribution Agreement, dated as of December 20, 1996, between the Registrant and Vanstar
Finance Co. (incorporated by reference to Exhibit 10.2) (6)
10.30 Intercreditor Agreement, dated as of December 20, 1996, among PAR Accounts Receivable Capital
Corporation, the Registrant, Vanstar Finance Co., and Nesbitt Burns Securities, Inc. (incorporated by
reference to Exhibit 10.4)(6)
*11.1 Statement re Calculation of Earnings Per Share
***12.1 Statement re Computation of Ratio of Earnings to Fixed Charges
***21.1 List of subsidiaries
*23.1 Consent of Arter & Hadden (previously included as part of its opinion filed as Exhibit 5.1 hereto)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
***23.2 Consent of Ernst & Young LLP, independent auditors
*24.1 Power of Attorney
*25.1 Form T-1 Statement of Eligibility and Qualification under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"), of Wilmington Trust Company as Trustee under the Indenture relating to
the 6 3/4% Convertible Subordinated Debentures Due 2016
*25.2 Form T-1 Statement of Eligibility under the Trust Indenture Act of Wilmington Trust Company as
Property Trustee under the Amended and Restated Declaration of Trust
*25.3 Form T-1 Statement of Eligibility under the Trust Indenture Act of Wilmington Trust Company as
Preferred Guarantee Trustee under the Preferred Securities Guarantee Agreement
</TABLE>
- ------------------------
(1) Incorporated by reference to Exhibits with the corresponding number (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 2.1 to the Registrant's Current Report
on Form 8-K dated June 14, 1996.
(4) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with Registrant's Annual Report on Form 10-K for
the fiscal year ended April 30, 1996.
(5) 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.
(6) Incorporated by reference to Exhibits with the number indicated filed with
the Registrant's Current Report on Form 8-K dated December 26, 1996 and
filed with Commission on January 10, 1997.
* Previously filed.
** Portions of this Exhibit were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Registrant's Application
Requesting Confidential Treatment under Rule 406 under the Securities Act.
*** Filed herewith.
<PAGE>
VANSTAR CORPORATION
1996 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE I
GENERAL PROVISIONS
A. PURPOSE
1. This 1996 Stock Option/Stock Issuance Plan (the "Plan") is intended
to promote the interests of Vanstar Corporation, a Delaware corporation (the
"Corporation"), by providing a method whereby eligible individuals who
provide valuable services to the Corporation (or its Parent or Subsidiary
corporations) may be offered incentives and rewards which will encourage them
to acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Corporation and continue to render services to the
Corporation (or its Parent or Subsidiary corporations).
2. For purposes of the Plan, the following provisions shall be
applicable in determining the Parent and Subsidiary corporations of the
Corporation:
(a) Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered to be a
Parent ("Parent") corporation of the Corporation, provided each such
corporation in the unbroken chain (other than the Corporation) owns, at the
time of the determination, stock possessing fifty percent (50%) or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain.
(b) Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be considered to
be a Subsidiary ("Subsidiary") of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain owns, at
the time of the determination, stock possessing fifty percent (50%) or more
of the total combined voting power of all classes of stock in one of the
other corporations in such chain. However, for purposes of any NSO grants
made under Article II and direct share issuances made under Article III, the
term subsidiary shall also include any other corporation, partnership, joint
venture or other business entity of which the Corporation owns, directly or
indirectly through another subsidiary corporation, a fifty percent (50%) or
greater interest in voting power, capital or profits.
B. STRUCTURE OF THE PLAN
1. The Plan shall be divided into two separate components: the Option
Grant Program (the "Option Grant Program") specified in Article II and the
Stock Issuance Program (the "Stock Issuance Program") specified in Article
III.
<PAGE>
2. Under the Option Grant Program, eligible individuals may be granted
options to purchase shares of Common Stock. Each person to whom an option is
granted under the Option Grant Program is referred to herein as an "Optionee."
3. Under the Stock Issuance Program, eligible individuals may be issued
shares of Common Stock directly, either through the immediate purchase of
such shares from the Corporation or as a bonus tied to the performance of
services or the Corporation's attainment of financial objectives, without any
cash payment required of the recipient. Such shares may be fully vested when
issued or may vest over time. Each person to whom shares are issued under the
Stock Issuance Program is referred to herein as a "Participant."
4. The provisions of Articles I and IV of the Plan shall apply to both
the Option Grant Program and the Stock Issuance Program and shall accordingly
govern the interests of all individuals in the Plan.
C. ADMINISTRATION OF THE PLAN
1. The Corporation's Board of Directors (the "Board"), its Executive
Committee or a committee (the "Committee") of two or more Board members shall
administer the Plan. Members of the Committee shall serve for such period of
time as the Board may determine and shall be subject to removal by the Board
at any time. When used in this Plan, the term "Plan Administrator" shall mean
the Board, the Executive Committee or the Committee, as the case may be,
administering the Plan at the time in question.
2. The Plan Administrator shall have full power and authority (subject
to the express provisions of the Plan) to establish such rules and
regulations as it may deem appropriate for the proper administration of the
Plan and to make such determinations under, and issue such interpretations
of, the Plan and any outstanding option grants or share issuances as it may
deem necessary or advisable. Decisions of the Plan Administrator shall be
final and binding on all parties who have an interest in the Plan or any
outstanding option or share issuance.
3. The Plan Administrator may delegate any or all of its authority and
duties under the Plan to the Chief Executive Officer or to any other senior
officer or officers of the Corporation under such terms and conditions as the
Plan Administrator may establish; provided, however, that only the Plan
Administrator may approve option grants and share issuances to participants
who are subject to the reporting requirements of Section 16 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), with respect to the
Corporation.
D. OPTION GRANTS AND SHARE ISSUANCES
1. The persons eligible to receive option grants pursuant to the Option
Grant program and/or share issuances under the Stock Issuance Program shall
be officers, directors and employees of, and consultants to, the Corporation
(or its Parent or Subsidiary corporations).
-2-
<PAGE>
2. The Plan Administrator shall have full authority to determine, (i)
with respect to the option grants made under the Plan, which eligible
individuals are to receive option grants, the number of shares to be covered
by each such grant, the status of the granted option as either an incentive
stock option (an "ISO") which satisfies the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or a
non-qualified stock option (an "NSO") not intended to meet such requirements,
the time or times at which each granted option is to become exercisable, the
vesting schedule (if any) applicable to the shares purchasable under the
option, the exercise price of such option and the maximum term for which the
option may remain outstanding, and (ii) with respect to share issuances under
the Stock Issuance Program, the number of shares to be issued to each
Participant, the vesting schedule (if any) to be applicable to the issued
shares, and the consideration to be paid by the individual for such shares.
3. The Plan Administrator shall have the absolute discretion either to
grant options in accordance with Article II of the Plan or to effect share
issuances in accordance with Article III of the Plan.
E. STOCK SUBJECT TO THE PLAN
1. The stock issuable under the Plan shall be shares of the
Corporation's authorized and unissued or reacquired common stock, $.001 par
value (the "Common Stock"). The maximum number of shares which may be issued
over the term of the Plan shall not exceed 3,300,000 shares. The total number
of shares issuable under the Plan shall be subject to adjustment from time to
time in accordance with the provisions of Section E.3. of this Article I.
2. Shares subject to the unexercised portion of any outstanding options
under the Plan which expire or terminate prior to exercise in full or which
are otherwise cancelled in accordance with the cancellation-regrant
provisions of Section D of Article II shall be available for subsequent
option grants or stock issuances under the Plan. Shares subject to
outstanding options shall NOT be available for subsequent option grants under
the Plan to the extent options are surrendered in accordance with the stock
appreciation right provisions of Section E of Article II. Shares issued under
either the Option Grant Program or the Stock Issuance Program (whether as
vested or unvested shares) and repurchased by the Corporation shall NOT be
available for subsequent option grants or stock issuances under the Plan.
3. In the event any change is made to the outstanding Common Stock by
reason of any stock dividend, stock split, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan and (ii) the number and/or class of securities and the option
price per share in effect under each outstanding option in order to prevent
the dilution or enlargement of benefits thereunder. The adjustments
determined by the Plan Administrator shall be final, binding and conclusive.
-3-
<PAGE>
4. Common Stock issuable under the Plan, whether under the Option Grant
Program or the Stock Issuance Program, may be subject to such restrictions on
transfer, repurchase rights or other restrictions as may be determined by the
Plan Administrator.
ARTICLE II
OPTION GRANT PROGRAM
A. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Plan shall be authorized by action
of the Plan Administrator and may, at the Plan Administrator's discretion, be
either ISOs or NSOs. Individuals who are not Employees (as defined in
subsection 3.(b) below) may only be granted NSOs. Each granted option shall
be evidenced by one or more instruments in the form approved by the Plan
Administrator; PROVIDED, HOWEVER, that each such instrument shall comply with
the terms and conditions specified in Sections A and C of this Article II.
Each instrument evidencing an ISO shall, in addition, be subject to the
applicable provisions of Section B of this Article II.
1. OPTION PRICE.
(a) The option price per share shall be fixed by the Plan
Administrator.
(b) The option price shall become immediately due upon exercise
of the option and shall, subject to the provisions of Article IV, Section A,
be payable in cash or check drawn to the Corporation's order. Should the
Corporation's outstanding Common Stock be registered under Section 12 of the
Exchange Act at the time the option is exercised, then the option price may
also be paid as follows:
(i) in shares of Common Stock held by the Optionee for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at fair market value on the
Exercise Date (as defined herein); or
(ii) through a special sale and remittance procedure
pursuant to which the Optionee is to provide irrevocable written
instructions (i) to a designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover the
aggregate option price payable for the purchased shares plus all applicable
Federal and state income and employment taxes required to be withheld by
the Corporation by reason of such purchase and (ii) concurrently to the
Corporation or, if instructed by the Corporation, to the transfer agent for
the Common Stock, to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale transaction.
-4-
<PAGE>
The Exercise Date shall be the date on which the Corporation shall have
received an executed stock purchase agreement for the purchased shares, in
form and substance satisfactory to the Corporation. Except to the extent such
sale and remittance procedure above is used in connection with the option
exercise, payment of the option price for the purchased shares plus all
applicable Federal and state income and employment taxes required to be
withheld by the Corporation by reason of such purchase must accompany the
stock purchase agreement.
(c) The fair market value per share of Common Stock on any
relevant date under the Plan shall be determined in accordance with the
following provisions:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the NASDAQ
National Market System ("NASDAQ"), the fair market value shall be the
closing selling price per share of Common Stock on the date in question, as
such price is reported by the National Association of Securities Dealers
through NASDAQ or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the fair market
value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed or admitted
to trading on any stock exchange, then the fair market value shall be the
closing selling price per share of Common Stock on the date in question on
the stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no closing
selling price for the Common Stock on the date in question, then the fair
market value shall be the closing selling price on the last preceding date
for which such quotation exists.
(iii) If the Common Stock at the time is neither listed nor
admitted to trading on any stock exchange nor traded on NASDAQ, or if the
Plan Administrator determines that the value determined pursuant to
subparagraphs (i) and (ii) above does not accurately reflect the fair
market value of the Common Stock, then such fair market value shall be
determined by the Plan Administrator after taking into account such factors
as the Plan Administrator shall deem appropriate.
2. TERM AND EXERCISE OF OPTIONS. Each option granted under the Plan
shall be exercisable at such time or times, during such period, and for such
number of shares as shall be determined by the Plan Administrator and set
forth in the stock option agreement evidencing such option. However, no
option granted under the Plan shall have a term in excess of ten (10) years
from the grant date. During the lifetime of the Optionee, the option shall be
exercisable only by the Optionee and shall not be assignable or transferable
by the Optionee otherwise than by will or by the laws of descent and
distribution following the Optionee's death.
-5-
<PAGE>
3. TERMINATION OF SERVICE.
(a) The following provisions shall govern the exercise period
applicable to any options held by the Optionee at the time of cessation of
service with the Corporation ("Cessation of Service") or death.
(i) The option shall, to the extent it is not otherwise at
the time exercisable for vested shares of Common Stock, immediately
terminate and cease to be outstanding upon the Optionee's Cessation of
Service.
(ii) Should the Optionee cease to remain in Service (as
hereinafter defined) for any reason other than death or permanent
disability, then the period during which each outstanding option held by
such Optionee is to remain exercisable shall be limited to the three (3)
month period following the date of such Cessation of Service.
(iii) In the event such Service terminates by reason of
permanent disability (as defined in Section 22(e)(3) of the Code) or should
the Optionee die while holding one or more outstanding options, then the
period during which each such option is to remain exercisable (to the
extent exercisable at the effective time of such termination) shall be
limited to the twelve (12) month period following the date of the
Optionee's Cessation of Service or death. During the limited exercise
period following the Optionee's death, the option may be exercised by the
personal representative of the Optionee's estate or by the person or
persons to whom the option is transferred pursuant to the Optionee's will
or in accordance with the laws of descent and distribution.
(iv) Under no circumstances, however, shall any such option
be exercisable after the specified expiration date of the option term.
(v) During the applicable post-Service exercise period, the
option may not be exercised for more than the number of option shares (if
any) in which the Optionee is vested at the time of Cessation of Service.
Upon the expiration of such post-Service exercise period or (if earlier)
upon the expiration of the option term, the option shall terminate and
cease to be outstanding for any vested shares for which the option has not
otherwise been exercised.
(vi) Should (A) the Optionee's Service be terminated for
misconduct (including, but not limited to, any act of dishonesty, willful
misconduct, fraud or embezzlement) or (B) the Optionee make any
unauthorized use or disclosure of confidential information or trade secrets
of the Corporation or its Parent or Subsidiaries, then in any such event
all outstanding options held by the Optionee under this Article II shall
terminate immediately and cease to be outstanding.
(b) For all purposes under the Plan, unless specifically provided
otherwise in the option agreement evidencing the option grant and/or the
purchase agreement
-6-
<PAGE>
evidencing the purchased shares, the Optionee shall be deemed to remain in
"Service" for so long as such individual renders services on a periodic basis
to the Corporation or any Parent or Subsidiary corporation in the capacity of
an Employee, a non-employee member of the board of directors or a consultant
or independent contractor. The Optionee shall be considered to be an
"Employee" for so long as such individual remains in the employ of the
Corporation or one or more of its Parent or Subsidiary corporations, subject
to the control and direction of the employer entity as to both the work to be
performed and the manner and method of performance.
(c) The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time the
option remains outstanding, to permit one or more options granted under this
Article II to be exercised not only for the number of shares for which each
such option is exercisable at the time of the Optionee's Cessation of Service
but also for one or more subsequent installments of purchasable shares for
which the option would otherwise have become exercisable had such Cessation
of Service not occurred.
(d) The Plan Administrator shall have full power and authority
to extend the period of time for which the option is to remain exercisable
following the Optionee's Cessation of Service or death from the limited
period specified in subparagraph (a) to such greater period of time as the
Plan Administrator shall deem appropriate under the circumstances. In no
event, however, shall such option be exercisable after the specified
expiration date of the option term.
4. STOCKHOLDER RIGHTS. An Optionee shall have none of the rights of
a stockholder with respect to any shares covered by the option until such
Optionee shall have exercised the option and paid the option price.
5. REPURCHASE RIGHTS.
(a) The Plan Administrator shall have the discretion to authorize
the issuance of unvested shares of Common Stock under this Article II. Should
the Optionee cease Service while holding such unvested shares, then the
Corporation shall have the right to repurchase any or all of those unvested
shares at the option price paid per share. The terms and conditions upon
which such repurchase right shall be exercisable (including the period and
procedure for exercise and the appropriate vesting schedule for the purchased
shares) shall be established by the Plan Administrator and set forth in the
instrument evidencing such repurchase right.
(b) The Plan Administrator shall have the discretionary authority,
exercisable either before or after the Optionee's Cessation of Service, to
cancel the Corporation's outstanding repurchase rights with respect to one or
more shares purchased or purchasable by the Optionee under this Article II
and thereby accelerate the vesting of such shares in whole or in part at any
time. All outstanding repurchase rights under the Plan shall terminate
automatically upon the occurrence of any Corporate Transaction under Section
C of this Article
-7-
<PAGE>
II, except to the extent the repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
B. INCENTIVE STOCK OPTIONS
The terms and conditions specified below shall be applicable to all
ISOs granted under the Plan. ISOs may only be granted to individuals who are
Employees. Options which are specifically designated as NSOs when issued
under the Plan shall NOT be subject to such terms and conditions.
1. OPTION PRICE. The option price per share of the Common Stock
subject to an ISO shall in no event be less than one hundred percent (100%)
of the fair market value per share of Common Stock on the grant date.
2. DOLLAR LIMITATION. The aggregate fair market value (determined
as of the respective date or dates of grant) of the Common Stock for which
one or more options granted to any Employee under this Plan (or any other
option plan of the Corporation or any Parent or Subsidiary corporation) may
for the first time become exercisable as incentive stock options under the
Federal tax laws during any one calendar year shall not exceed the sum of One
Hundred Thousand Dollars ($100,000). To the extent the Employee holds two or
more such options which become exercisable for the first time in the same
calendar year, the foregoing limitation on the exercisability of such options
as ISOs under the Federal tax laws shall be applied on the basis of the order
in which such options are granted. Should the number of shares of Common
Stock for which any ISO first becomes exercisable in any calendar year exceed
the applicable One Hundred Thousand Dollar ($100,000) limitation, then the
option may nevertheless be exercised in that calendar year for the excess
number of shares as an NSO under the Federal tax laws.
3. 10% STOCKHOLDER. If any individual to whom an ISO is granted is
the owner of stock (as determined under Section 424(d) of the Code)
possessing ten percent (10%) or more of the total combined voting power of
all classes of stock of the Corporation or any one of its Parent or
Subsidiary corporations, then the option price per share shall not be less
than one hundred ten percent (110%) of the fair market value per share of
Common Stock on the grant date, and the option term shall not exceed five (5)
years from the grant date.
4. OTHER PLAN PROVISIONS. Except as modified by the preceding
provisions of this Section B, all the provisions of the Plan shall be
applicable to the ISOs granted hereunder.
C. CORPORATE TRANSACTION
1. The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option is outstanding, to provide that one or more options at the time
outstanding under this Article II shall automatically accelerate in
connection with any Corporate Transaction (as hereinafter defined) so that
each such option shall, immediately prior to the specified effective date for
such Corporate Transaction, become
-8-
<PAGE>
fully exercisable with respect to the total number of shares of Common Stock
at the time subject to such option and may be exercised for all or any
portion of such shares. For purposes of such acceleration, the term Corporate
Transaction shall be limited to any of the following stockholder-approved
transactions:
(i) a merger or consolidation in which more than fifty
percent (50%) of the Corporation's outstanding voting stock is transferred
to a person or persons different from those who held the stock immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation or
dissolution of the Corporation.
In no event, however, shall an outstanding option with such acceleration
provision accelerate if and to the extent: (A) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, (B) such option is to be replaced with a cash incentive program of
the successor corporation which, as determined by the Plan Administrator,
preserves the option spread existing at the time of the Corporate Transaction
and provides for subsequent payout in accordance with the same vesting
schedule applicable to such option or (C) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant. The determination of option comparability under clause (A)
above shall be made by the Plan Administrator, and its determination shall be
final, binding and conclusive. The Plan Administrator shall also have full
power and authority to grant options under the Plan which are to
automatically accelerate in whole or in part immediately prior to the
Corporate Transaction or upon the subsequent termination of the Optionee's
Service, whether or not those options are otherwise to be assumed or replaced
in connection with the consummation of such Corporate Transaction.
2. Upon the consummation of the Corporate Transaction, all
outstanding options under the Plan, whether or not they contain an
acceleration provision under subparagraph 1. above, shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation
or its parent company.
3. Each outstanding option which is assumed in connection with the
Corporate Transaction or is otherwise to continue in effect shall be
appropriately adjusted, immediately after such Corporate Transaction, to
apply and pertain to the number and class of securities which would have been
issued to the option holder, in consummation of such Corporate Transaction,
had such person exercised the option immediately prior to such Corporate
Transaction. Appropriate adjustments shall also be made to the option price
payable per share, except that the aggregate option price payable for such
securities shall remain the same. In addition, the class and number of
securities available for issuance under the Plan following the consummation
of the Corporate Transaction shall be appropriately adjusted.
4. The grant of options under this Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise
change its capital or business structure
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<PAGE>
or to merge, consolidate, dissolve, liquidate or sell or transfer all or any
part of its business or assets.
5. The following provisions shall apply in the event of a merger,
consolidation, sale of assets, etc., resulting in a Change of Control (as
hereinafter defined):
(a) In the event of a Change in Control, anything contained
herein to the contrary notwithstanding, an option granted shall become fully
exercisable if, within six months of such Change in Control, the holder of
such Option shall cease to be an employee or for any reason to be a member of
the Board. For purposes hereof, a Change in Control of the Corporation shall
be deemed to have occurred if:
(i) there shall be consummated (x) any consolidation or
merger of the Corporation in which the Corporation is not the
continuing or surviving corporation or pursuant to which shares
of common stock of the Corporation would be converted into cash,
securities or other property, other than a merger of the
Corporation in which the holders of common stock of the
Corporation immediately prior to the merger have the same
proportionate ownership of common stock of the surviving
corporation immediately after the merger, or (y) any sale, lease,
exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets
of the Corporation; or
(ii) the stockholders of the Corporation approve any plan or
proposal for the liquidation or dissolution of the Corporation; or
(iii) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act, shall become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act) of 30%
or more of the Corporation's outstanding common stock; or
(iv) during any period of two consecutive years, individuals
who at the beginning of such period the entire Board shall cease
for any reason to constitute a majority thereof unless the
election, or the nomination for election by the Corporation's
stockholders, of each new director was approved by a vote of at
least two-thirds of the directors then still in office who were
directors at the beginning of the period.
(b) Any exercise of an option permitted pursuant to Section
5.C.1 shall be made within 180 days of the relevant Participant's termination
as an employee or director of the Corporation.
-10-
<PAGE>
D. CANCELLATION AND NEW GRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected Optionees,
the cancellation of any or all outstanding options under the Plan and to
grant in substitution therefor new options under the Plan covering the same
or different numbers of shares of Common Stock and having an option price per
share as may be determined by the Plan Administrator, but not less than (i)
one hundred percent (100%) of the fair market value per share of common Stock
on the new grant date in the case of a grant of an ISO, or (ii) one hundred
ten percent (110%) of such fair market value in the case of a grant of an ISO
to a 10% Stockholder.
E. STOCK APPRECIATION RIGHTS
1. One or more Optionees may be granted the right, exercisable upon
such terms and conditions as the Plan Administrator may establish, to
surrender all or part of an unexercised option under this Article II in
exchange for a distribution from the Corporation in an amount equal to the
excess of (i) the fair market value (on the option surrender date) of the
number of shares in which the Optionee is at the time vested under the
surrendered option (or surrendered portion thereof) over (ii) the aggregate
option price payable for such vested shares.
2. No such option surrender shall be effective unless it is
approved by the Plan Administrator. If the surrender is so approved, then
the distribution to which the Optionee shall accordingly become entitled
under this Section E may be made in shares of Common Stock valued at fair
market value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
3. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
LATER of (i) five (5) business days after the receipt of the rejection notice
or (ii) the last day on which the option is otherwise exercisable in
accordance with the terms of the instrument evidencing such option, but in no
event may such rights be exercised more than ten (10) years after the date of
the option grant.
4. One or more Optionees may, in the Plan Administrator's sole
discretion, be granted limited stock appreciation rights in tandem with their
outstanding options under this Article II. Upon the occurrence of a Hostile
Take-Over (as hereinafter defined) at a time when the Optionee is an officer
or director of the Corporation subject to the short-swing profit restrictions
of the Federal securities laws, then such Optionee shall have the
unconditional right, exercisable during the thirty (30) day period following
the consummation of the Hostile Take-Over, to surrender each option with such
a limited stock appreciation right outstanding for at least six (6) months to
the Corporation, to the extent the option is at the time exercisable for
vested shares of Common Stock. In return for the surrendered option, the
officer shall be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price (as hereinafter
defined) of the shares of Common Stock which are at the time
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<PAGE>
vested under each surrendered option (or surrendered portion) over (ii) the
aggregate exercise price payable for such vested shares. Such cash
distribution shall be paid within five (5) days following the option
surrender date. Neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option
surrender and cash distribution. The balance of the option (if any) shall
continue in full force and effect in accordance with the instrument
evidencing such grant.
5. For purposes of calculating the cash distribution under
Paragraph 4. above, the following terms shall have the meanings ascribed to
them below:
(a) "Hostile Take-Over" means a change in ownership of the
Corporation effected through the following transaction:
(i) any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is
controlled by, or is under common control with, the Corporation)
directly or indirectly acquires beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing
more than fifty percent (50%) of the total combined voting power
of the Corporation's outstanding securities pursuant to a tender
or exchange offer made directly to the Corporation's stockholders
which the Board does not recommend such stockholders to accept, and
(ii) more than fifty percent (50%) of the securities so
acquired in such tender or exchange offer are accepted from
holders other than the officers and directors of the Corporation
subject to the short-swing profit restrictions of Section 16 of
the 1934 Act.
(b) "Take-Over Price" means the GREATER of (a) the fair market
value per share of Common Stock on the date of surrender, as determined in
accordance with the valuation provisions of subsection A.1.(c) of Article II,
and (b) the highest reported price per share of Common Stock paid by the
tender offeror in effecting such Hostile Take-Over; PROVIDED, HOWEVER, that
if the surrendered option is an ISO, the Take-Over Price shall not exceed the
price per share determined pursuant to clause (a) above.
6. The shares of Common Stock subject to any option surrendered for
an appreciation distribution in accordance with this Section E shall NOT be
available for subsequent option grants or share issuances under the Plan.
-12-
<PAGE>
ARTICLE III
STOCK ISSUANCE PROGRAM
A. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock shall be issuable under the Stock Issuance
Program through direct and immediate issuances without any intervening stock
option grants. Each such stock issuance shall be evidenced by a Stock
Issuance Agreement ("Issuance Agreement") which complies with each of the
terms and conditions of this Article III.
1. CONSIDERATION
(a) Shares of Common Stock drawn from the Corporation's
authorized but unissued shares of Common Stock ("Newly Issued Shares") shall
be issued under the Plan for one or more of the following items of
consideration which the Plan Administrator may deem appropriate in each
individual instance:
(i) cash or check drawn to the Corporation's order;
(ii) a promissory note payable to the Corporation's order in
one or more installments, which may be subject to cancellation in
whole or in part upon terms and conditions established by the
Plan Administrator; or
(iii) past services rendered to the Corporation or any Parent
or Subsidiary Corporation.
(b) Newly Issued Shares may in the sole discretion of the Plan
Administrator be issued for consideration with a value determined by the Plan
Administrator in its sole discretion.
(c) Shares of Common Stock reacquired by the Corporation and
held as treasury shares ("Treasury Shares") may be issued under the Plan for
such consideration (in whatever form) as the Plan Administrator may deem
appropriate. Accordingly, such Treasury Shares may, in lieu of any cash
consideration, be issued subject to such vesting requirements tied to the
Participant's period of future Service or the Corporation's attainment of
specified performance objectives as the Plan Administrator may establish at
the time of issuance.
2. VESTING PROVISIONS
(a) Shares of Common Stock issued under the Plan may, in the
absolute discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service (as such term is defined in subsection
A.3.(b) of Article II). The elements of the vesting schedule applicable to
any unvested shares of Common Stock issued under the Plan, namely:
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<PAGE>
(i) the Service period to be completed by the Participant
or the performance objectives to be achieved by the Corporation,
(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, disability or other event
designated by the Plan Administrator is to have upon the vesting
schedule,
shall be determined by the Plan Administrator and incorporated into the
Issuance Agreement executed by the Corporation and the Participant at the
time such unvested shares are issued.
(b) The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to him or her under the Plan,
whether or not his or her interest in those shares is vested. Accordingly,
the Participant shall have the right to vote such shares and to receive any
regular cash dividends paid on such shares. Any new, additional or different
shares of stock or other property (including money paid other than as a
regular cash dividend) which the Participant may have the right to receive
with respect to his or her unvested shares by reason of any stock dividend,
stock split, reclassification of Common Stock or other similar change in the
Corporation's capital structure or by reason of any Corporate Transaction
under Section B of this Article III shall be issued, subject to (i) the same
vesting requirements applicable to his or her unvested shares and (ii) such
escrow arrangements as the Plan Administrator shall deem appropriate.
(c) Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock under the Plan, then
those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further stockholder rights
with respect to those shares. To the extent the surrendered shares were
previously issued to the Participant for consideration paid in cash or cash
equivalent (including the Participant's purchase-money promissory note), the
Corporation shall repay to the participant the cash consideration paid for
the surrendered shares and shall cancel the principal balance of any
outstanding purchase-money note of the Participant to the extent attributable
to such surrendered shares. The surrendered shares may, at the Plan
Administrator's discretion, be retained by the Corporation as Treasury Shares
or may be retired to authorized but unissued share status.
(d) The Plan Administrator may in its discretion elect to waive
the surrender and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such wavier may
be effected at any time, whether before or after the Participant's Cessation
of Service or the attainment or non-attainment of the applicable performance
objectives.
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<PAGE>
3. TRANSFER RESTRICTIONS/SHARE ESCROW
(a) Unvested shares may, in the Plan Administrator's discretion,
be held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing such unvested shares. To the extent
an escrow arrangement is utilized, the unvested shares and any securities or
other assets issued with respect to such shares (other than regular cash
dividends) shall be delivered in escrow to the Corporation to be held until
the Participant's interest in such shares (or other securities or assets)
vests. Alternatively, if the unvested shares are issued directly to the
Participant, the restrictive legend on the certificates for such shares shall
read substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND
ARE ACCORDINGLY SUBJECT TO CERTAIN TRANSFER RESTRICTIONS AND
TO CANCELLATION OR REPURCHASE IN THE EVENT THE REGISTERED HOLDER
(OR HIS/HER PREDECESSOR IN INTEREST) CEASES TO REMAIN IN THE
CORPORATION'S SERVICE. SUCH TRANSFER RESTRICTIONS AND THE TERMS
AND CONDITIONS OF SUCH CANCELLATION OR REPURCHASE ARE SET FORTH
IN A STOCK ISSUANCE AGREEMENT BETWEEN THE CORPORATION AND THE
REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) DATED
________________, 19__, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE CORPORATION."
(b) The Participant shall have no right to transfer any
unvested shares of Common Stock issued to him or her under the Plan. For
purposes of this restriction, the term "transfer" shall include (without
limitation) any sale, pledge, assignment, encumbrance, gift, or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled, and
neither the Participant nor the proposed transferee shall have any rights
with respect to those shares. However, the Participant shall have the right
to make a gift of unvested shares acquired under the Plan to his or her
spouse or issue, including adopted children, or to a trust established for
such spouse or issue, provided the donee of such shares delivers to the
Corporation a written agreement to be bound by all the provisions of the Plan
and the Issuance Agreement applicable to the gifted shares.
B. CORPORATE TRANSACTION
All of the Corporation's outstanding repurchase rights under this
Article III shall automatically terminate upon the occurrence of a Corporate
Transaction (as defined in Section C of Article II), except to the extent the
Corporation's outstanding repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with the Corporate
Transaction.
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<PAGE>
ARTICLE IV
MISCELLANEOUS
A. LOANS
1. The Plan Administrator may assist any Optionee or Participant
(including an Optionee or Participant who is an officer or director of the
Corporation) in the exercise of one or more options granted to such Optionee
under the Article II Option Grant Program or the purchase of one or more
shares issued to such Participant under the Article III Stock Issuance
Program, including the satisfaction of any federal and state income and
employment tax obligations arising therefrom, by
(i) authorizing the extension of a loan from the Corporation
to such Optionee or Participant, or
(ii) permitting the Optionee or Participant to pay the option
price or purchase price for the purchased Common Stock in
installments over a period of years.
2. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) shall be established by
the Plan Administrator in its sole discretion. Loans or installment payments
may be granted with or without security or collateral. In all events the
maximum credit available to each Optionee or Participant may not exceed the
SUM of (i) the aggregate option price or purchase price payable for the
purchased shares (less the par value payable for the purchased shares) plus
(ii) any Federal and state income and employment tax liability incurred by
the Optionee or Participant in connection with such exercise or purchase.
3. The Plan Administrator may, in its absolute discretion,
determine that one or more loans extended under the financial assistance
program shall be subject to forgiveness by the Corporation in whole or in
part upon such terms and conditions as the Plan Administrator in its
discretion deems appropriate.
B. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any Parent or Subsidiary corporation of the Corporation) or
of the Optionee or the Participant, which rights are hereby expressly
reserved by each, to terminate the Service of the Optionee or Participant at
any time for any reason whatsoever, with or without cause.
C. AMENDMENT OF THE PLAN
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<PAGE>
The Board may at any time prior to the Termination Date (as defined
herein) modify and amend the Plan in any respect; PROVIDED, HOWEVER, that the
approval of the holders of a majority of the votes that may be cast by all of
the holders of shares of capital stock of the Company, if any, entitled to
vote (voting as a single class) shall be obtained prior to any such amendment
becoming effective if such approval is required by law or is necessary to
comply with regulations promulgated by the SEC under Section 16(b) of the
1934 Act or with Section 422 of the Code or the regulations promulgated by
the Treasury Department thereunder.
D. EFFECTIVE DATE AND TERM OF PLAN
1. The Plan shall become effective when adopted by the Board, but
no ISO granted under the Plan shall become exercisable unless and until the
Plan shall have been approved by the Corporation's stockholders. If such
stockholder approval is not obtained within twelve (12) months after the date
of the Board's adoption of the Plan, then all options previously granted
under the Plan intended as ISOs shall thereupon be deemed to have been issued
as NSOs, and no further ISOs shall be granted hereunder. Subject to such
limitation in the case of ISOs, the Plan Administrator may grant options
under the Plan at any time after the effective date and before the date fixed
herein for termination of the Plan.
2. The Plan shall terminate upon the EARLIER of (i) the tenth
anniversary of the date on which the Plan is adopted by the Board or (ii) the
date on which all shares available for issuance under the Plan have been
issued or cancelled pursuant to the exercise of options or stock appreciation
rights granted under Article II or the issuance of shares under Article III
(in each case, the "Termination Date"). If the Termination Date is
determined under clause (i) above, then no options or stock appreciation
rights outstanding on such date under Article II and no shares issued and
outstanding on such date under Article III shall be affected by the
termination of the Plan, and such securities shall thereafter continue to
have force and effect in accordance with the provisions of the stock option
agreements evidencing such Article II options and stock appreciation rights
and the stock purchase agreements evidencing the issuance of such Article III
shares.
E. WITHHOLDING
The Corporation's obligation to deliver shares upon the exercise of
any options granted under Article II or upon the purchase of any shares
issued under Article III shall be subject to the satisfaction of all
applicable Federal, state and local income and employment tax withholding
requirements.
F. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under
the Option Grant Program, the issuance of any shares under the Stock Issuance
Program, and the issuance of Common Stock upon the exercise of the option
grants made hereunder shall be subject to the Corporation's procurement of
all approvals and permits required by regulatory authorities having
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<PAGE>
jurisdiction over the Plan, the options granted under it, and the Common
Stock issued pursuant to it.
51611.1H
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<PAGE>
EXHIBIT 12.1
VANSTAR CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEVEN MONTHS FISCAL YEAR ENDED
SEPTEMBER 30, ENDED APRIL 30,
-------------------- APRIL 30, -------------------- SIX MONTHS ENDED
1992 1993 1994 1995 1996 OCTOBER 31, 1996
--------- --------- ------------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations before provision
for income taxes.................................. $ (96,514) $ (25,492) $ (11,615) $ 2,149 $ 12,782 $ 34,078
Add:
Interest expense.................................. 21,337 23,045 12,789 32,555 35,804 10,892
Portion of rents representative of the interest
factor.......................................... 4,033 5,067 2,900 4,733 4,600 2,929
--------- --------- ------------- --------- --------- -------
Earnings........................................ $ (71,144) $ 2,620 $ 4,074 $ 39,437 $ 53,186 $ 47,899
--------- --------- ------------- --------- --------- -------
--------- --------- ------------- --------- --------- -------
Fixed charges:
Interest expense.................................... $ 21,337 $ 23,045 $ 12,789 $ 32,555 $ 35,804 $ 10,892
Portion of rents representative of the interest
factor............................................ 4,033 5,067 2,900 4,733 4,600 2,929
--------- --------- ------------- --------- --------- -------
Total fixed charges............................... $ 25,370 $ 28,112 $ 15,689 $ 37,288 $ 40,404 $ 13,821
--------- --------- ------------- --------- --------- -------
--------- --------- ------------- --------- --------- -------
Ratio of earnings to fixed charges.................... -- 0.09 0.26 1.06 1.32 3.47
--------- --------- ------------- --------- --------- -------
--------- --------- ------------- --------- --------- -------
Excess (deficiency) of earnings over fixed charges.... $ (96,514) $ (25,492) $ (11,615) $ 2,149 $ 12,782 $ 34,078
--------- --------- ------------- --------- --------- -------
--------- --------- ------------- --------- --------- -------
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF VANSTAR CORPORATION
(AS OF JANUARY 10, 1997)
<TABLE>
<CAPTION>
VANSTAR FOREIGN
PLACE OF DOMICILE DOMESTIC SUBSIDIARIES OWNERSHIP OWNERSHIP
- ------------------------ --------------------------------------------------------------- ------------- ---------------
<S> <C> <C> <C>
California ComputerLand International Development, Inc. 100%
Delaware ComputerPort World Trade, Inc. 100%
Texas CLand Tex, Inc. 100%
Delaware Vanstar Asia Pacific Corporation 100%
(FORMERLY C/L GOVERNMENT ACCOUNTS CORP)
Delaware Vanstar Financing Trust (1)
Delaware VST West, Inc. 100%
Delaware VST Midwest, Inc. 100%
North Carolina VSTNC, Inc. 100%
Illinois VST Illinois, Inc. 100%
Delaware Vanstar Finance Co. 100%
<CAPTION>
VANSTAR FOREIGN
PLACE OF DOMICILE FOREIGN SUBSIDIARIES OWNERSHIP OWNERSHIP
- ------------------------ --------------------------------------------------------------- ------------- ---------------
<S> <C> <C> <C>
Belgium Vanstar Belgium N.V. (2)
Chile ComputerLand de Chile, SA 100%
Hong Kong ComputerLand Corporation of America 50% 50%(3)
(China) Limited (BEING DISSOLVED)
ComputerLand Corporation of America 50% 50%(3)
(China) Asia Pacific Limited (BEING DISSOLVED)
ComputerPort World Trade Limited 100%
(BEING DISSOLVED)
Luxembourg Vanstar Europe 99.9%(4)
Mexico ComputerLand de Mexico, S.A. de C.V. 49% 51%(5)
Singapore ComputerLand Far East Pte. Limited 100%
Thailand ComputerLand Corporation (Thailand) Co., Ltd. 100%
United Kingdom Vanstar UK Limited (6)
</TABLE>
- ------------------------
(1) Vanstar Financing Trust, a statutory business trust formed under the laws of
Delaware, is a wholly-owned subsidiary of Vanstar Corporation for accounting
purposes.
(2) 99.96% owned by Vanstar Europe; .04% owned by William Y. Tauscher
(3) Fanlaw ltd., a Hong Kong company holding shares for Vanstar Corporation
(4) .1% owned by William Y. Tauscher
(5) Mexicanos de Datos, a Mexican company
(6) 100% owned by Vanstar Europe
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption Experts and to the
use of our reports dated June 10, 1996, in the Amendment No. 1 to Registration
Statement (Form S-1) and related Prospectus (333-16307 and 333-16307-01) of
Vanstar Corporation and Vanstar Financing Trust dated January 10, 1997.
/s/ Ernst & Young LLP
San Jose, California
January 10, 1997
