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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1997
OR
( )TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to _________
Commission file number: 1-14192
VANSTAR CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2376431
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5964 West Las Positas Boulevard
Pleasanton, California 94588
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 734-4000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $0.001 par value New York Stock Exchange
("Common Stock")
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on June 30, 1997 (based on the closing New York Stock Exchange
sale price on such date) was $337,945,342 using beneficial ownership rules
adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to
exclude stock that may be beneficially owned by directors, executive officers
or 10% stockholders, some of whom might not be held to be affiliates upon
judicial determination.
The number of outstanding shares of Common Stock of the Registrant as of June
30, 1997 was 42,903,179.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement") to be filed with the
Securities and Exchange Commission, are incorporated by reference into Part
III hereof.
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VANSTAR CORPORATION
INDEX TO FORM 10-K
Page
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 16
ITEM 3. LEGAL PROCEEDINGS 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 17
ITEM 6. SELECTED FINANCIAL DATA 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 45
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 46
SIGNATURES 49
FORWARD-LOOKING STATEMENTS
WITH THE EXCEPTION OF HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS
ANNUAL REPORT ON FORM 10-K INCLUDE FORWARD-LOOKING STATEMENTS. THOSE
STATEMENTS RELATE TO DIVIDENDS, BUSINESS TRENDS, USES OF FUTURE EARNINGS,
SATISFACTION OF FUTURE CASH REQUIREMENTS, FUNDING OF FUTURE GROWTH,
ACQUISITION PLANS, AND OTHER MATTERS. THOSE STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED HEREIN. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, CHANGES IN DEMAND FOR VANSTAR'S PRODUCTS AND
SERVICES, CHANGES IN RELATIONSHIPS WITH SIGNIFICANT CUSTOMERS, THE
INTRODUCTION OF NEW TECHNOLOGY (WHICH, AMONG OTHER RESULTS, CAN PLACE
INVENTORY AT CONSIDERABLE VALUATION RISK) AND SERVICES, CHANGES IN THE LEVEL
OF OPERATING EXPENSES, COMPETITIVE CONDITIONS (INCLUDING THE INTENSE PRICE
COMPETITION IN VANSTAR'S MARKETS), PRODUCT SUPPLY, AND CHANGES IN
RELATIONSHIPS WITH THE KEY VENDORS UPON WHICH VANSTAR DEPENDS. FOR A
DISCUSSION OF THESE FACTORS AND OTHERS, PLEASE SEE "CERTAIN BUSINESS FACTORS"
IN ITEM 1 OF THIS ANNUAL REPORT ON FORM 10-K. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS MADE IN, OR
INCORPORATED BY REFERENCE INTO, THIS ANNUAL REPORT ON FORM 10-K OR IN ANY
DOCUMENT OR STATEMENT REFERRING TO THIS ANNUAL REPORT ON FORM 10-K.
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PART I
ITEM 1. BUSINESS
Vanstar Corporation ("Vanstar" or the "Company") is a leading provider
of services and products designed to build, manage and enhance personal
computer ("PC") network infrastructures for Fortune 1000 companies and other
large enterprises. The Company provides customized, 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 hardware, network products, computer peripherals and software
from many vendors. The Company's services are organized around an integrated
model called "Life Cycle Management." Life Cycle Management includes design
and consulting, acquisition and deployment, operation and support, and
enhancement and migration to support the customers' PC network infrastructure
throughout its life cycle. Service delivery is optimized through the proper
application of automated systems, highly trained technical personnel and
proven, repeatable processes to support the customer's network infrastructure
throughout its entire life cycle.
The Company believes that its customers require increasingly
sophisticated PC network systems and support infrastructures yet are
constrained by limited technical personnel to design, manage and enhance
these infrastructures. Vanstar seeks to satisfy corporate infrastructure
requirements while seeking to minimize its customers' internal staff
requirements and systems development risk. Vanstar enhances the delivery of
its services and products with automated systems, such as the Vanstar Aviator
and Navigator, and with process methodologies, such as Horizon, to analyze,
design and manage its customers' PC network infrastructures more effectively.
The Company's goal is to help customers reduce the total cost of technology
ownership, increase productivity and reduce the risks of migrating to new
technologies.
The Company's current capabilities were developed internally and through
acquisitions. These strategic acquisitions included: (i) the acquisition from
1990 through 1992, of 23 of the Company's franchisees, operating in 33 major
United States metropolitan markets; (ii) the 1991 acquisition of NYNEX
Business Centers; (iii) the 1992 acquisition of the Customer Services
Division of TRW, Inc.; (iv) the 1996 acquisition of the western and
southwestern regions of the Dataflex Corporation; (v) the 1996 acquisition of
Mentor Technologies, Ltd; and (vi) the 1996 merger with Contract Data
Services, Inc. (then doing business as "National Technology Group").
The Company was incorporated in September 1987 under the name
"ComputerLand Corporation" following the acquisition by William Y. Tauscher,
Warburg, Pincus Capital Company, L.P. and Richard H. Bard of the majority of
the capital stock of the Company's predecessor, IMS Associates, Inc. ("IMS").
IMS was merged with the Company after such acquisition. At that time, the
Company operated and franchised computer retail stores in the United States.
In 1994, the Company sold its remaining United States franchise business
to Merisel FAB, Inc., a wholly-owned subsidiary of Merisel Inc., adopted the
name Vanstar, and changed its fiscal year end from September 30 to April 30.
INDUSTRY
Client/server computing has grown dramatically for large businesses in
recent years as PC, software, and network technologies have improved and end
users have demanded more and easier access to data and applications. The
shift to client/server has placed tremendous strain on large corporations,
who must buy, install, maintain, and upgrade networks that link potentially
thousands of PCs.
The Company believes many corporations are eager to implement the most
advanced computer technologies in an effort to increase productivity and
profitability. However, today's chief information officers are faced with
limited resources and the challenge of designing new networks, integrating
the latest technologies, migrating to new systems and training new end users.
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For these reasons, decisions regarding outsourcing are among the most
strategic that can be made by an organization. Large organizations are
looking to distributed computing technology to improve their competitive
position. They are seeking assistance in transforming and re-engineering
their businesses to take advantage of new technologies. They also recognize
that these new technologies require infrastructures that need to be managed
differently from traditional mainframe systems.
The Company believes business technology buying has matured and
corporate customers have become more knowledgeable about integrating new
technologies and how to get the most for their business out of the new
technologies. Rather than rushing out to purchase and install new systems,
they are carefully considering their business goals and how technology can
help them achieve those goals. Companies are seeking the services of
full-service information technology service providers who can evaluate their
current PC networking systems as well as design a system that will help them
meet business goals now and in the future.
The Company believes that many companies are realizing that they lack
the systems and expertise to effectively manage enterprise PC networks.
Developing this capability is expensive, technically complex and
time-consuming. Many corporations find themselves struggling with patchwork
solutions and they lack the in-house expertise to do the job. It is by
definition not their core competency. They cannot run their businesses
without cost-effective, robust, reliable PC networks; however, in order to
stay competitive they cannot take their focus or development resources away
from key areas of their core business.
The Company believes that no other company in the marketplace today
offers customers the same range of integrated PC network solutions and
highly-trained technical personnel and business technology consultants as
Vanstar. Many service providers, including systems integrators, consulting
firms and those emerging from the traditional mainframe environment, offer
limited services, lack the 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 (incorporating
highly-qualified technical personnel) spanning the PC network 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
Vanstar'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 resulting in lower costs, minimized risk,
and greater management control. Vanstar's Life Cycle Management services
include design and consulting, acquisition and deployment, operation and
support, and enhancement and migration. Vanstar 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 yet have limited
technical personnel to design and maintain these infrastructures. Vanstar
seeks to deliver comprehensive network infrastructure solutions while
minimizing its customers' internal staff requirements and systems development
risk. Vanstar 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.
Vanstar also uses automation to give its customers greater control over order
management and provision of services. The Company's automated systems permit
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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 Aviator, the Company's
web-based product procurement system, provides an easy-to-use customer
interface for self-service order management. The Vanstar Aviator connects to
Vanstar's Cockpit, which provides the Company's customer service
representatives with real-time product availability, pricing and
customer-specific account information. Another example is Vanstar's NOVA
system, a service delivery system being implemented by the Company for the
management of many of the Company's services: 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.
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. Vanstar 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
Vanstar has approximately 260 current customers who purchased products
and services totaling at least $1.0 million during fiscal year 1997.
Preserving and enhancing its relationship with these customers is the
Company's first priority. In support of this effort, the Company maintains
its StarBase Account Management system. StarBase is an extensive database of
customer information which is integrated with external data to pinpoint
opportunities for the Company.
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. According to a report by Donaldson, Lufkin & Jenrette,
the market for outsourced PC network services is expected to grow at a
compound annual rate of approximately 16%. These services are typically sold
at higher margins than more traditional services, such as product procurement
or repair and maintenance. Vanstar has developed expertise and solutions in
a number of value-added market segments, has established four National
Consulting Practices focused on emerging technologies 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, Vanstar provides services to integrate
Microsoft Windows NT and Intel Pentium-class systems and deploy Computer
Associates' Unicenter TNG network management solutions into Vanstar's
customers' environments. The Company believes its relationship with
Microsoft and Intel enhances its knowledge base and expertise.
Vanstar continually evaluates and pursues opportunities to acquire
technology and other resources that will enhance and extend the reach of its
value-added service offerings.
EXPAND 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 utilizes a program that overlays Vanstar'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 provides Vanstar's U.S. based
multinational customers a common management interface covering Vanstar
performed services in the United States or services from Vanstar or its
alliance partners in other countries.
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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.
PRODUCTS AND SERVICES
Vanstar 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. The Company's services are organized
around an integrated model called "Life Cycle Management". Life Cycle
Management includes design and consulting, acquisition and deployment,
operation and support, and enhancement and migration to support the
customers' PC network infrastructure throughout its life cycle. The Company
offers each service as a discrete service or as part of an integrated Life
Cycle Management program. The Company believes that proper planning and
management are essential to providing 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.
Vanstar delivers technology services through its four primary service
organizations: Professional Services, Life Cycle Services, Product Services
and Education Services. The Company's Professional Services Organization
focuses on delivering solutions to help customers implement new network
infrastructures and migrate to new technologies. The Life Cycle Services
organization provides services to support day-to-day operations in customer's
existing IT environments. Vanstar's Product Services group supports both
Life Cycle Services and the Professional Services Organization by providing
technology product procurement, configuration, and distribution services.
The Company's Education Services group focuses on increasing end-user
productivity by providing technology skills assessment and training services.
<TABLE>
<CAPTION>
VANSTAR SERVICE ORGANIZATION FOCUS SERVICES
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<S> <C>
Professional Services New network infrastructures -Design and Consulting
and migrations to new technology -Enhancement & Migration
- -----------------------------------------------------------------------------------------------
Life Cycle Services Day-to-day IT operations -Operation & Support
- -----------------------------------------------------------------------------------------------
Product Services Product purchase & configuration -Acquisition & Deployment
- -----------------------------------------------------------------------------------------------
Education Services End-user productivity -Education Consulting
-Training
- -----------------------------------------------------------------------------------------------
</TABLE>
DESIGN AND CONSULTING SERVICES
Vanstar 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 network projects: discovery, current state definition, requirements
definition, solution design, and implementation planning. The Company
employs national consulting practices including Business Solutions
Consulting, Microsoft Platforms, Network Design, and Program and Project
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
Vanstar's network deployment services include product procurement,
configuration, distribution, installation, cabling and connectivity.
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The Company sources PCs, servers, network products, computer peripherals
and software to equip the network environment. The Company provides products
from over 700 vendors, including Compaq Computer Corporation, International
Business Machines Corporation ("IBM"), Hewlett-Packard Company, Apple
Computer, Inc., Sun Microsystems, Inc., Microsoft, 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. Vanstar 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.
Vanstar has centralized its configuration and distribution facilities in
two highly automated distribution centers located in Indianapolis, Indiana
and Livermore, California. In June 1997, the Company completed the
construction of a new 415,000 square foot distribution and manufacturing
center in Indianapolis. The Company's 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
Vanstar 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.
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 Vanstar's approximately 90 service locations.
The Company offers a single point of contact ("SPOC") service to provide
seamless integration and fulfillment of customer's needs for technology
products, services, training and support. Customers' end users call one
toll-free number for all of their PC needs, whether they require assistance
with operating a PC application, ordering new hardware or software,
installing/upgrading hardware or software, operating a mainframe application
or establishing a network connection. The SPOC coordinates all of the
operations and support services provided to Vanstar customers through a
single focal point, with the goal of reducing the total cost of PC/LAN
ownership, reducing the risk of deploying new technology, increasing end-user
productivity and increasing end-user satisfaction. SPOC can include any of
the following services - help desk, installs, moves, adds and changes
("IMAC") activities, system maintenance, procurement management, asset
management, training and network management.
The Company has also developed a network operations center, to provide
the technology infrastructure to deliver remote network and systems
management services, aimed at helping customers reduce the total cost of
ownership for networked PCs, improve end user productivity and reduce
technology deployment risk. The network operations center provides remote
management to actively monitor customer networks for optimal performance,
manage storage requirements and network capacity, manage standard PC
configurations across the network, manage electronic distribution of
software, and provide network security monitoring and administration.
The Company provides asset management services. The Company's asset
management system captures and maintains detailed information about a
customer's installed base of PC hardware and software
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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. Developed
under Horizon, Vanstar's development methodology, and managed using Lotus
Notes, 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 bases its education and training services on a consultative
methodology that effectively assesses the customer's business environment and
the skill sets of each user to identify training needs for critical
applications in each area of the business. The Company then utilizes
traditional as well as innovative training methods, training facilities and
certified instructors to deliver the appropriate training for each student.
Vanstar is a Microsoft Authorized Technical Education Center, providing
training for Microsoft Windows 95, Windows NT, and BackOffice.
RECENT ACQUISITION
On July 7, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Sysorex Information Systems, Inc. ("Sysorex"), a government technology
provider which reported revenues of approximately $150 million for its fiscal
year ended September 30, 1996. The purchase price was approximately $46.0
million, including net liabilities of approximately $11.0 million, subject to
certain post-closing adjustments, and a contingent payment of 500,000 shares
of Common Stock, based upon the future financial performance of the acquired
business. The acquisition is expected to expand Vanstar's technology
services into the U.S. Federal Government markets which are experiencing
high-growth demand for IT services as a result of the recent adoption of
commercial-based IT practices.
AUTOMATED SYSTEMS, PROCESS METHODOLOGIES AND TECHNICAL PERSONNEL
Vanstar enhances its service delivery with customized automated systems
which utilize open architecture and enable Vanstar's customers to change the
processes they use to manage their PC network support infrastructures,
thereby reducing cost and managing complexity. 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 Vanstar to analyze, design and manage the PC network
environment better. In addition to the Company's systems and methodologies,
Vanstar believes that expert technical and consulting personnel are
fundamental to its ability to deliver complete network life cycle solutions.
AUTOMATED SYSTEMS
Vanstar has invested significant resources automating its internal
service delivery systems and developing electronic links between the
Company's systems and its customers' systems. The Company believes that
these systems reduce costs, enhance service quality and improve reporting.
The automated systems include the Vanstar Aviator, Cockpit, Distribution
Center Management System ("DCMS"), FLEX and Tracker, and NOVA. The Company
uses electronic links, including Electronic Data Interchange, to connect to
customers' systems.
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- VANSTAR AVIATOR. The Vanstar Aviator is an order management system
designed to give customers access to information about products
available from the Company. The Vanstar Aviator is a web-based system
which provides customers with detailed information on product pricing
and availability, and can generate quotes, purchase orders, order
status, invoice history, on-line help and toll-free telephone support.
With the Vanstar Aviator, customers can place and track orders
themselves.
- COCKPIT. Vanstar's customer service representatives use the Company's
order management system, called "Cockpit," to generate quotes and to
enter and track product orders. Cockpit provides real-time product
availability and pricing information, and maintains detailed, customer-
specific account information, including account history, standard
product configurations, special pricing, locations, authorized
purchasing personnel and credit limits.
- DCMS, FLEX AND TRACKER. DCMS and its FLEX systems operate the
Company's automated distribution and configuration centers located in
Indianapolis, Indiana, and Livermore, California. DCMS and FLEX manage
the flow of orders through the distribution process and provide the
on-line information necessary to configure systems to customers'
standards. Operating on a LAN, DCMS assigns a unique barcode
fingerprint to each SKU as it arrives. Warehouse staff use radio
frequency, hand-held devices to manage and track the movement of
product orders through the centers. Vanstar's Tracker system tracks
each package from the warehouse to the customer site. Vanstar's
distribution centers are collocated with Federal Express depots. The
Company's systems are integrated with Federal Express' systems,
providing complete point-to-point delivery and tracking.
- NOVA. Vanstar is in the process of implementing NOVA, a service
delivery system for the management of its SPOC, dispatch, repair,
installation, moves/add/changes and asset management service
offerings. 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 Vanstar'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. To create a cooperative service environment,
Vanstar uses electronic links to connect its systems to its customers'
systems through Electronic Data Interchange, the Internet or 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, Vanstar uses several methods for capturing, codifying and
disseminating organizational knowledge to individuals in the field. Using
Horizon, its professional service development process, Vanstar 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.
TECHNICAL PERSONNEL
Vanstar deploys over 4,100 technical professionals in the United States.
The Company intends to continue to expand its staff of technical
professionals. The technical personnel are both client dedicated
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and centrally dispatched, and provide service on either a contract basis or a
project basis. The Company is also developing groups of technical
professionals who specialize in the areas of operations, methods and
practices, process management and consulting. The Company's Professional
Services Organization recently established a group of four national
consulting practices staffed with high-end consultants focused on emerging
technologies. The Company's engineering staff is certified in the major
network operating systems and has experience with LAN and WAN networking
products and protocols. The Company supports major network operating
systems, including Microsoft Windows NT and BackOffice, Novell NetWare, IBM
LAN Server and AppleShare.
CUSTOMERS
The Company's broad customer base of primarily Fortune 1000 companies
and other large enterprises includes the following, all of which purchased
products and services in excess of $1.0 million during the 12 months ended
April 30, 1997 from the Company:
CUSTOMER NAME INDUSTRY
- ------------- --------
American Express Corporation Credit Services
American Greetings Corporation Manufacturing
Autodesk Inc. Software
Blue Cross/Blue Shield Insurance
BellSouth Corporation Telecommunications
Charles Schwab and Company Inc. Financial Services
Chevron Oil/Gas
Cigna Corporation Insurance
Delta Airlines Airline
Duke Power Company Utility
Federal Express Corporation Transportation
Glaxo, Inc. Pharmaceuticals
Hoechst Celanese Corporation Chemicals
Hoffmann-La Roche Inc. Pharmaceuticals
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
Motorola Inc. High Technology
Owens-Corning Fiberglas Corporation Manufacturing
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
Vanstar markets its PC network services by targeting executives of large
enterprises who have information technology decision-making authority. As of
April 30, 1997, the Company's domestic sales network consisted of more than
800 field sales and inside service representatives. Vanstar's direct sales
force is comprised of account managers and technical sales personnel.
Vanstar's account management force is responsible for prospecting new
business, maintaining and expanding relationships with current customers, and
ensuring customer satisfaction. Technical sales personnel provide the
technical expertise to support and supplement the sales effort. To improve
sales productivity, Vanstar equips its sales organization with sales force
automation tools that provide them with a complete suite of marketing and
account management tools. These tools reduce the sales representatives'
physical dependence on the branch offices, allowing Vanstar to operate a
"virtual office" environment while sharing information across multiple
departments.
10
<PAGE>
CERTAIN BUSINESS FACTORS
SIGNIFICANT FLUCTUATIONS IN REVENUES AND OPERATING RESULTS
The Company's quarterly and annual revenues and operating results have
varied significantly in the past and are likely to continue to do so in the
future. Revenues and operating results may fluctuate as a result of the
demand for the Company's products and services, the introduction of new
hardware and software technologies offering improved features, the
introduction of new services by the Company and its competitors, changes in
the level of operating expenses, the 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. 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.
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. Until recently, the Company has
primarily funded its working capital requirements through its financing
program agreement with IBMCC (the "Financing Program Agreement"). As part
of the Company's refinancing plan, the Company used an aggregate of $300.7
million from its offering of Convertible Preferred Securities (as defined
herein) and the Securitization Facility (as defined herein) to reduce the
Company's outstanding indebtedness under the Financing Program Agreement. At
April 30, 1997, the outstanding principal balance under the Financing Program
Agreement was approximately $171.4 million, out of a total of $250 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. 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. 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.
Effective December 20, 1996, the Company established a revolving funding
trade receivables securitization facility (the "Securitization Facility"),
which provides the Company with up to $175 million in available credit. In
connection with the Securitization Facility, the Company sells, on a
revolving basis through a wholly-owned subsidiary, an undivided interest in
certain of its trade receivables ("Pooled Receivables"). As of April 30,
1997, the gross proceeds of those sales totaled $172.8 million. The majority
of those proceeds were used to reduce the Company's outstanding indebtedness
under the Financing Program Agreement. The remaining availability under the
Securitization Facility is used, among other purposes, to provide working
capital.
11
<PAGE>
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 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; 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
refinance its indebtedness (to the extent not restricted pursuant to the
terms thereof) depends on its financial and operating performance, which is
subject to prevailing economic conditions and to financial, business and
other factors beyond its control.
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.
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 4,100
technical professionals and has expanded its systems engineering force
significantly in recent years. Competition for such technical personnel in
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.
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 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 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.
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 an services that keep pace with technological developments and
address increasingly
12
<PAGE>
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.
DEPENDENCE ON KEY VENDORS AND PRODUCT SUPPLY
A significant portion of the Company's operating 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. 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 marketing development funds, which are used to offset a portion
of the Company's sales and marketing expense. Any change in the provision of
these credits could materially adversely affect the Company's operating
results. The Company is also dependent, in part, upon vendor financing for
working capital requirements. The failure of the Company to obtain vendor
financing on satisfactory terms and conditions could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The personal computer industry experiences significant product supply
shortages and customer order backlogs from time to time due to the inability
of certain manufacturers to supply certain products on a timely basis. In
addition, certain vendors have initiated new channels of distribution that
increase competition for the available product supply. The Company has
experienced product supply shortages in the past and expects to experience
such shortages from time to time in the future. Failure to obtain adequate
product supplies 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.
CONCENTRATION OF REVENUES
No single customer accounted for more than 10% of the Company's revenue
during fiscal year 1997. However, during fiscal 1997, the Company derived
approximately 54% of its revenues from its 50 largest
13
<PAGE>
customers. To the extent that the Company is successful in expanding its
relationship with new and existing customers among large enterprises such as
the Fortune 1000, its revenues may become more concentrated. While the
Company seeks to build long-term customer relationships, revenues from any
particular customer can fluctuate from period to period due to such
customer's purchasing patterns. Any termination or significant disruption of
the Company's relationships with any of its principal customers could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, a deterioration in the financial
condition of any of its principal customers could expose the Company to the
possibility of large accounts receivable write-offs, which could materially
adversely affect the Company's financial condition and results of operations.
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. 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 the Company's acquisitions can be integrated into the
Company's operations successfully.
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. 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.
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.
COMPETITION
The markets in which the Company operates are characterized by intense
competition from several types of technical service providers, including
mainframe and mid-range computer manufacturers and outsourcers entering the
PC services marketplace. These include Digital Equipment Corporation
Multi-Vendor Services, Electronic Data Systems Corporation, Hewlett-Packard
Company Multi-Vendor Services and IBM Global Services. Other competitors
include VARs, systems integrators and third-party service companies, such as
CompuCom Systems, Inc., DecisionOne, Entex Information Services, GE
Information Technology 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 competitors may 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.
14
<PAGE>
EMPLOYEES
As of May 1997, the Company had approximately 6,000 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.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided
below.
William Y. Tauscher, age 47, became Chairman of the Board of the Company
in September 1987 and Chief Executive Officer in September 1988. He was
President from September 1988 to July 1995. Prior to September 1988, Mr.
Tauscher was Chairman of the Board, President and Chief Executive Officer of
FoxMeyer Corporation, a wholesale pharmaceutical distributor and franchisor
which he co-founded in 1978 and a subsidiary of National Intergroup, Inc., a
diversified holding corporation.
Jay S. Amato, age 37, became President and Chief Operating Officer in
July 1995 and a director in December 1995. From January 1993 until July
1995, he was Senior Vice President and President, North America Operations of
the Company. From June 1991 until January 1993, Mr. Amato was Senior Vice
President, Major Market Operations of the Company, and from April 1989 until
June 1991, he was Vice President of Business Development of the Company. Mr.
Amato previously held various management positions at The Computer Factory,
Inc.
Richard N. Anderson, age 40, became Senior Vice President Sales in
December 1993. He was Vice President, Field Sales from October 1992 until
December 1993. From July 1991 to October 1992, Mr. Anderson 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, which had been one of the
largest Company franchisees. Prior thereto, Mr. Anderson was a Financial
Systems Consultant for Digital Equipment Corporation.
Kauko Aronaho, age 58, became Senior Vice President and Chief Financial
Officer in June 1997. He worked as an independent consultant in the
technology industry from June 1996 to June 1997. From August 1995 to June
1996, Mr. Aronaho was the President of SHL Computer Innovations, Inc., a
Canadian provider of products and services to build and manage computer
networks. He was Senior Vice President and Chief Financial Officer of SHL
Computer Innovations, Inc. from 1989 to August 1995.
H. Christopher Covington, age 47, became Senior Vice President, General
Counsel and Secretary in August 1994. From April 1993 until August 1994, he
was Vice President. From November 1990 until April 1993, Mr. Covington was
Assistant General Counsel and Assistant Secretary of the Company. From
January 1988 until November 1990, he was a partner in the law firm of Hardin,
Cook, Loper, Engel & Bergez.
Chris M. Laney, age 40, 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, Mr. Laney was Western
Regional Director of Networking Services. From October 1989 until April
1992, he was Director of Networking Services for Dataphaz, Inc., which had
been a Company franchisee.
Ahmad Manshouri, age 56, became Senior Vice President and General
Manager Product Operations in July 1995. He was Senior Vice President,
Purchasing and Vendor Management from January 1993 until July 1995. From
July 1992 until January 1993, Mr. Manshouri was a Vice President of the
Company. Prior thereto, he was the founder and Vice President of Infomax,
Inc., which had been one of the largest Company franchisees.
15
<PAGE>
ITEM 2. PROPERTIES
The Company leases office space for its headquarters in Pleasanton,
California, under a lease expiring in January 1998. The Company leases a new
415,000 square foot distribution center in Indianapolis, Indiana. The lease
on the new facility will expire in April 2007. In addition, the Company
leases a 192,000 square foot distribution center and a 29,000 square foot
return center in Livermore, California, a 52,000 square foot repair facility
in Wharton, New Jersey, and various office space near Atlanta, Georgia. The
lease for the Livermore, California, distribution center expires in September
1999, subject to two five-year options to renew held by the Company; the
lease for the Livermore, California, return center expires in September 1999;
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 a portion of the Atlanta premises expires in May 1998 with the leases
covering the remainder of the Atlanta premises expiring in 1999. 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.
ITEM 3. LEGAL PROCEEDINGS
On July 3, 1997, a trust claiming to have purchased shares of the Common
Stock filed suit in Superior Court of the State of California, County of
Santa Clara, against the following persons or entities: the Company, certain
directors and officers of the Company; the Company's principal stockholder,
Warburg Pincus Capital Company, L.P. and certain of its affiliates; and
Robertson Stephens & Co., Alex. Brown & Sons, Inc. and The Robinson-Humphrey
Company, Inc., each of which served as an underwriter in the Company's
initial public offering in March 1996. The plaintiff also seeks class action
status under California law and purports to represent a class of purchasers
of the Common Stock between March 11, 1996 and January 23, 1997. In its
original complaint, the plaintiff purports to state three causes of action
under California law, alleging generally, among other things, that the
defendants made false or misleading statements or concealed information
regarding the Company and that the plaintiff, as a holder of the Common
Stock, suffered damage as a result thereof. The plaintiff seeks compensatory
and punitive damages in an unspecified amount, together with other relief.
The suit is entitled David T. O'Neal Trust, Dated 4/1/77, v. Vanstar
Corporation, et al., Case No. CV767266. The Company believes that the
plaintiff's allegations are without merit and intends to defend the suit
vigorously.
Various other legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of these actions will not have a
material adverse effect on the Company's financial position or results of
operations, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year ended April 30, 1997.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock began trading on the New York Stock Exchange (the "NYSE")
under the symbol "VST" on March 11, 1996. The following table sets forth,
for the periods indicated, the range of high and low sale prices for the
Common Stock on the NYSE since March 11, 1996.
HIGH LOW
---- ---
Fiscal Year Ended April 30, 1997:
Fourth Quarter $ 16 1/2 $ 6 1/2
Third Quarter 28 1/4 13 3/4
Second Quarter 29 3/4 15 3/4
First Quarter 17 3/8 12 1/4
Fiscal Year Ended April 30, 1996:
Fourth Quarter (March 11, 1996
through April 30, 1996) 15 5/8 9
As of June 30, 1997, there were 383 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on the Common
Stock and does not presently intend to pay cash dividends on the Common Stock
in the foreseeable future. The Company intends to retain future earnings for
reinvestment in its business. The Company's Financing Program Agreement with
IBM Credit Corporation ("IBMCC") limits the Company's ability to declare or
pay cash dividends on the Common Stock. In addition, the Indenture relating
to the Company's 6 3/4% Convertible Subordinated Debentures due 2016 (the
"Debentures") gives the Company the right to defer interest payments on the
Debentures. If the Company exercises that interest payment deferral option,
then during any deferral period, the Company may not declare or pay dividends
on, or make distributions with respect to, the Common Stock, except dividends
or distributions in shares of the Common Stock.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated annual financial data presented below was derived
from the Company's audited consolidated financial statements. This selected
consolidated annual financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR ENDED MONTHS FISCAL YEAR ENDED
APRIL 30, ENDED SEPTEMBER 30,
------------------------------------ APRIL 30, --------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue $ 2,178,566 $1,804,813 $1,385,392 $ 586,514 $1,099,813 $ 787,798
Gross margin 313,964 244,927 210,538 97,002 178,024 91,280
Operating income (loss) 68,279 43,047 28,127 (434) (3,296) (76,272)
Income (loss) from
continuing operations (1) 35,138 8,053 1,268 (6,969) (18,751) (54,228)
Net income (loss) 29,994 17,247 1,268 44,505 (4,246) (51,967)
Income (loss) from
continuing operations per
share (2) 0.69 0.23 0.04 (0.24) (1.89) (5.54)
Primary and fully diluted
earnings (loss) per share (2) $ 0.69 $ 0.50 $ 0.04 $ 1.52 $ (0.68) $ (5.33)
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, SEPTEMBER 30,
-------------------------------------------------- -------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 758,643 $ 803,365 $ 705,295 $ 610,458 $ 576,279 $ 700,035
Short-term borrowings 74,402 - - 262,783 194,660 227,692
Current maturities of long-term debt 4,785 1,759 7,685 12,788 23,190 14,898
Long-term debt, less current
maturities 5,946 293,007 337,750 6,732 13,017 32,219
Company-obligated mandatorily
redeemable convertible preferred
securities of subsidiary trust
holding solely convertible
subordinated debt securities
of the Company (3) 194,518 - - - - -
Redeemable preferred stock and
accrued dividends - - - 4,777 4,464 3,986
Total stockholders' equity $ 166,971 $ 127,053 $ 22,589 $ 24,797 $ 13,584 $ 684
</TABLE>
(1) Represents income from continuing operations before distributions on
preferred securities of Trust of $5.1 million (net of applicable
taxes) in fiscal year 1997.
(2) Earnings per share for the fiscal years ended April 30, 1996 and 1995
are presented giving effect to the conversion of all outstanding shares
of Preferred Stock into Common Stock and the exchange of all outstanding
warrants for shares of Common Stock in connection with the Company's
initial public offering on March 11, 1996, as if the conversion had
occurred at the later of the beginning of fiscal year 1995 or the
issuance date of the respective security.
(3) The sole asset of the Trust is $207.5 million aggregate principal amount
of the Company's 6 3/4% Convertible Subordinated Debentures due year
2016.
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<PAGE>
QUARTERLY OPERATING RESULTS
The following tables set forth the unaudited operating results for each of
the four quarters in fiscal year 1997 and 1996. These numbers have been
derived from the Company's unaudited quarterly financial statements and in
the opinion of management, reflect all adjustments (of a normal and recurring
nature) which are necessary for a fair representation of the results of
operations for the interim periods.
<TABLE>
<CAPTION>
4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1997
- --------------------------------
REVENUE:
Product $457,656 $438,587 $463,057 $490,065
Services:
Life cycle 50,697 47,944 42,532 38,939
Professional 31,208 30,555 27,600 21,698
Training and other 8,640 10,456 10,544 8,388
-------- -------- -------- --------
Total revenue 548,201 527,542 543,733 559,090
-------- -------- -------- --------
GROSS MARGIN:
Product 45,746 43,494 46,441 48,472
Services:
Life cycle 17,444 16,762 14,548 14,485
Professional 9,126 9,995 12,273 8,417
Training and other 5,577 6,417 8,019 6,748
-------- -------- -------- --------
Total gross margin 77,893 76,668 81,281 78,122
-------- -------- -------- --------
GROSS MARGIN PERCENTAGE:
Product 10.0% 9.9% 10.0% 9.9%
Services:
Life cycle 34.4% 35.0% 34.2% 37.2%
Professional 29.2% 32.7% 44.5% 38.8%
Training and other 64.5% 61.4% 76.1% 80.4%
-------- -------- -------- --------
Total gross margin percentage 14.2% 14.5% 14.9% 14.0%
-------- -------- -------- --------
Selling, general and administrative
expenses 68,960 60,489 59,340 56,896
% of total revenue 12.6% 11.5% 10.9% 10.2%
Operating income 8,933 16,179 21,941 21,226
% of total revenue 1.6% 3.1% 4.0% 3.8%
-------- -------- -------- --------
NET INCOME $ 1,632 $ 7,521 $ 11,078 $ 9,763
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY AND FULLY DILUTED EARNINGS PER
SHARE $ 0.04 $ 0.17 $ 0.26 $ 0.23
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1996
- --------------------------------
REVENUE:
Product $424,055 $391,130 $389,030 $374,083
Services:
Life cycle 36,145 34,758 34,031 33,484
Professional 17,197 16,514 13,561 10,855
Training and other 8,257 4,460 8,506 8,747
-------- -------- -------- --------
Total revenue 485,654 446,862 445,128 427,169
-------- -------- -------- --------
GROSS MARGIN:
Product 40,843 36,254 36,597 34,200
Services:
Life cycle 11,542 13,075 12,091 12,423
Professional 5,423 6,353 6,338 4,899
Training and other 6,982 3,208 7,326 7,373
-------- -------- -------- --------
Total gross margin 64,790 58,890 62,352 58,895
-------- -------- -------- --------
GROSS MARGIN PERCENTAGE:
Product 9.6% 9.3% 9.4% 9.1%
Services:
Life cycle 31.9% 37.6% 35.5% 37.1%
Professional 31.5% 38.5% 46.7% 45.1%
Training and other 84.6% 71.9% 86.1% 84.3%
-------- -------- -------- --------
Total gross margin percentage 13.3% 13.2% 14.0% 13.8%
-------- -------- -------- --------
Selling, general and administrative
expenses 31,855 76,891 46,772 46,362
% of total revenue 6.6% 17.2% 10.5% 10.9%
Operating income (loss) 32,935 (18,001) 15,580 12,533
% of total revenue 6.8% (4.0%) 3.5% 2.9%
-------- -------- -------- --------
Income (loss) from continuing operations 16,519 (16,731) 4,951 3,314
Gain on disposal of discontinued
businesses - 9,194 - -
-------- -------- -------- --------
NET INCOME (LOSS) $ 16,519 $ (7,537) $ 4,951 $ 3,314
-------- -------- -------- --------
-------- -------- -------- --------
PRIMARY AND FULLY DILUTED EARNINGS
(LOSS) PER SHARE (PRO FORMA PRIOR
TO MARCH 11, 1996): (1)
Continuing operations $ 0.44 $ (0.53) $ 0.15 $ 0.10
Discontinued operations - 0.29 - -
-------- -------- -------- --------
$ 0.44 $ (0.24) $ 0.15 $ 0.10
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(1) Earnings per share for fiscal year 1996 are presented giving effect to
the conversion of all outstanding shares of Preferred Stock into Common
Stock and the exchange of all outstanding warrants for shares of Common
Stock in connection with the Company's initial public offering on March
11, 1996, as if the conversion had occurred at the later of the
beginning of fiscal year 1995 or the issuance date of the respective
security.
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 (see note 3 of notes to consolidated financial statements).
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the fiscal year ended April 30, 1997, the Company's results of
operations were impacted by the transactions described below. On May 24,
1996, the Company acquired certain of the assets and business operations of
the western and southwestern regions of Dataflex Corporation (the "Dataflex
Regions"). The Dataflex Regions offered PC product distribution, service and
support in the states of Arizona, California, Colorado, Nevada, New Mexico,
and Utah with combined revenues of $145 million reported for the fiscal year
ended March 31, 1996. On September 4, 1996, the Company acquired Mentor
Technologies, Ltd., an Ohio limited partnership providing training and
educational services in Ohio and throughout the upper mid-western United
States, ("Mentor Technologies"). Mentor Technologies reported revenues of
$5.5 million for the calendar year ended December 31, 1995. During October
1996, the Company, through the Vanstar Financing Trust, a Delaware statutory
business trust (the "Trust"), issued 4,025,000 Trust Convertible Preferred
Securities ("Convertible Preferred Securities"). Those securities are
convertible into the Common Stock and pay cumulative cash distributions at an
annual rate of 6 3/4% of the liquidation amount of $50 per security. On
December 16, 1996, the Company acquired Contract Data Services, Inc. ("CDS"),
a North Carolina corporation with reported revenues of $74.3 million for the
fiscal year ended March 31, 1996. CDS provided outsourcing of integrated
information technology services, related technical support services and
procurement of computer hardware and software. Effective December 20, 1996,
the Company established the Securitization Facility which provides the
Company with up to $175 million in available credit. In connection with the
Securitization Facility the Company sells, on a revolving basis through a
wholly-owned subsidiary, an undivided interest in the Pooled Receivables.
Vanstar's four primary sources of revenue are: product, life cycle
services, professional services, and training and other services. The
Company refers to the integration of the offerings of design and consulting,
acquisition and deployment, operation and support, and enhancement and
migration as "Life Cycle Management." For larger clients, Vanstar can manage
every phase of the life cycle of its customers' PC networks. Product revenue
is primarily derived from the sale of computer hardware, software,
peripherals and communications devices manufactured by third parties and sold
by the Company, principally to implement integration projects. Life cycle
services revenue is primarily derived from services performed for the desktop
and focused on the client or user of the PC network. These support services
include desktop installation, repair and maintenance, moves, adds and
changes, extended warranty, asset management and help desk. Professional
services revenue is primarily derived from high value-added services,
including services focused on the server and communication segments of the PC
network infrastructure. Professional services revenue includes network
installation, design and consulting, and enhancement and migration, as well
as server deployment and support. Training and other services revenue is
primarily derived from fees earned on the distribution services agreement
with ComputerLand Corporation (formerly with Merisel FAB) and training and
education services. Pursuant to the distribution services agreement, the
Company provides product distribution to franchises and affiliates of
ComputerLand Corporation (see note 3 of notes to consolidated financial
statements).
The following table 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 and as a
percentage of total revenue and (iii) operating income (loss) in total and as
a percentage of total revenue:
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE:
Product $ 1,849,365 $ 1,578,298 $1,187,392
Services:
Life cycle 180,112 138,418 131,194
Professional 111,061 58,127 31,842
Training and other 38,028 29,970 34,964
------------ ------------ ----------
Total revenue $ 2,178,566 $ 1,804,813 $1,385,392
------------ ------------ ----------
------------ ------------ ----------
GROSS MARGIN:
Product $ 184,153 $ 147,894 $ 113,513
Services:
Life cycle 63,239 49,131 55,053
Professional 39,811 23,013 13,111
Training and other 26,761 24,889 28,861
------------ ------------ ----------
Total gross margin $ 313,964 $ 244,927 $ 210,538
------------ ------------ ----------
------------ ------------ ----------
GROSS MARGIN PERCENTAGE:
Product 10.0% 9.4% 9.6%
Services:
Life cycle 35.1% 35.5% 42.0%
Professional 35.8% 39.6% 41.2%
Training and other 70.4% 83.0% 82.5%
------------ ------------ ----------
Total gross margin percentage 14.4% 13.6% 15.2%
------------ ------------ ----------
------------ ------------ ----------
Selling, general and administrative expenses $ 245,685 $ 201,880 $ 182,411
% of total revenue 11.3% 11.2% 13.2%
Operating income $ 68,279 $ 43,047 $ 28,127
% of total revenue 3.1% 2.4% 2.0%
</TABLE>
YEAR ENDED APRIL 30, 1997 AS COMPARED TO THE YEAR ENDED APRIL 30, 1996
PRODUCT. Revenue increased 17.2% to $1.8 billion for the year ended April
30, 1997 from $1.6 billion for the year ended April 30, 1996 as a result of
the Company's successful sales and marketing efforts, strengthened market
position and increased sales resulting from the acquisitions of CDS and the
Dataflex Regions. Gross margin increased 24.5% to $184.2 million for the
year ended April 30, 1997 from $147.9 million for the year ended April 30,
1996. Gross margin percentage increased to 10.0% for the year ended April
30, 1997 from 9.4% for the year ended April 30, 1996. The increase in gross
margin percentage reflects the changing nature of the Company's relationships
with its customers in moving toward long-term procurement service
relationships as opposed to periodic commodity buying. Revenue growth slowed
during the second half of the year, which led the Company to "resize" its
business in the fourth quarter of the fiscal year to accommodate that
moderation in growth. The Company's plans for fiscal year 1998 were adjusted
to reflect a lower level of volume than previously anticipated. There can be
no assurance that product revenue growth will return to the levels seen in
the first half of fiscal year 1997.
LIFE CYCLE SERVICES. Revenue increased 30.1% to $180.1 million for the
year ended April 30, 1997 from $138.4 million for the year ended April 30,
1996. This increase was the result of increased demand for the Company's
overall life cycle service offerings plus increased sales as the result of
the acquisition of CDS. Gross margin increased 28.7% to $63.2 million for
the year ended April 30, 1997 from $49.1 million for the year ended April 30,
1996. Gross margin percentage decreased to 35.1% for the year ended April
30, 1997 from 35.5% for the year ended April 30, 1996.
22
<PAGE>
PROFESSIONAL SERVICES. Revenue increased 91.1% to $111.1 million for the
year ended April 30, 1997 from $58.1 million for the year ended April 30,
1996. This increase reflects the increased customer demand for the Company's
extensive consulting and deployment expertise through national practices
focused on emerging technologies. Gross margin increased 73.0% to $39.8
million for the year ended April 30, 1997 from $23.0 million for the year
ended April 30, 1996. Gross margin percentage decreased to 35.8% for the year
ended April 30, 1997 from 39.6% for the year ended April 30, 1996 due to
significant investments made in systems, recruiting, training, and
development to enhance the Company's professional service offerings.
TRAINING AND OTHER SERVICES. Revenue increased 26.9% to $38.0 million for
the year ended April 30, 1997 from $30.0 million for the year ended April 30,
1996 due to an increase in training revenues primarily as a result of the
acquisition of Mentor Technologies. Gross margin increased 7.5% to $26.8
million for the year ended April 30, 1997 from $24.9 million for the year
ended April 30, 1996. Gross margin percentage decreased to 70.4% for the
year ended April 30, 1997 from 83.0% for the year ended April 30, 1996 as the
contribution of training revenues to total other services revenue increased.
Revenue from training increased 127.0% and other revenue declined 7.8% for
the year, resulting in an increase in the contribution from training from
25.8% to 46.1%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 21.7% to $245.7 million for the year ended
April 30, 1997 from $201.9 million for the year ended April 30, 1996.
Selling, general and administrative expenses as a percentage of total revenue
remained relatively constant for the year ended April 30, 1997 as compared to
the year ended April 30, 1996. The increase in selling, general and
administrative expenses was due to an increase in services revenue as a
percentage of total revenue (which carries higher selling, general and
administrative expenses than product), lower than expected product revenues
and certain costs associated with resizing the Company to accommodate a
reduction in the growth rate of the product business. These increases were
partially offset by the reversal of certain amounts provided for in the
original reserves established in connection with the sale of the Company's
U.S. franchise business.
OPERATING INCOME. Operating income increased 58.6% to $68.3 million for
the year ended April 30, 1997 from $43.0 million for the year ended April 30,
1996. Operating income as a percentage of total revenue increased to 3.1% for
the year ended April 30, 1997 from 2.4% for the year ended April 30, 1996 as
a result of the increase in total gross margin percentage.
INTEREST INCOME. Interest income decreased 33.5% to $3.7 million for the
year ended April 30, 1997 from $5.5 million for the year ended April 30, 1996
due to lower interest earned on the Company's extended credit on certain of
its trade receivables due from Merisel FAB plus lower discounts taken.
FINANCING EXPENSES, NET. Financing expenses, net for the year ended April
30, 1997 represents primarily interest incurred on borrowings under the
Company's financing agreement with IBMCC and discounts and net expenses
associated with the Company's Securitization Facility. Financing expenses,
net for the year ended April 30, 1996 and 1995 represents primarily interest
incurred on borrowings under the Company's financing agreement with IBMCC.
Financing expenses, net decreased 52.3% to $17.1 million for the year ended
April 30, 1997 from $35.8 million for the year ended April 30, 1996 due to
significantly lower average borrowings and lower interest rates. The decline
in average borrowings which resulted in lower financing expenses was due to
the issuance of the Debentures to the Trust in October 1996, the proceeds of
which were used to repay borrowings under the financing agreement with IBMCC,
combined with improved cash flow from increased profitability (see note 9 of
notes to consolidated financial statements).
TAXES. The effective tax rate for the year ended April 30, 1997 of 36%
and 1996 of 37.0%, was different than the U.S. statutory rate of 35.0%
primarily due to state tax provisions.
23
<PAGE>
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, 1996 from $113.5 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.
LIFE CYCLE 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 life cycle 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.
PROFESSIONAL SERVICES. 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.
TRAINING AND 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.
FINANCING EXPENSES, NET. Financing expenses, net for the years ended April
30, 1996 and 1995 represents primarily interest incurred on borrowings under
the Company's financing agreement with IBMCC. Financing expenses 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 product 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.
24
<PAGE>
DISCONTINUED OPERATIONS
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 3 of notes to consolidated financial
statements).
DEFERRED TAX ASSETS
At April 30, 1997 and 1996, the Company has recorded net deferred tax
assets of $14.9 million and $31.3 million, respectively. The full
realization of the deferred tax assets carried at April 30, 1997 is dependent
upon the Company achieving future pretax earnings, prior to the expiration of
the net operating loss carryforwards, of $41.4 million. The net operating
loss carryforwards expire in the years 2000 through 2010. Management
believes that sufficient taxable income will be generated from operations to
realize the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has utilized cash generated from operations, including sales of
certain of its trade receivables, and proceeds from the issuance of
Convertible Preferred Securities and Common Stock to fund its significant
revenue growth, working capital requirements, payments on its debt
obligations, and purchases of businesses and capital expenditures.
In October, 1996, the Trust sold 4,025,000 Convertible Preferred
Securities, raising gross proceeds of $201.3 million. The holders of the
Convertible Preferred Securities are entitled to cumulative cash
distributions at an annual rate of 6 3/4% of the liquidation amount of $50
per security. The distributions are payable quarterly in arrears in the
aggregate amount of approximately $3.4 million per quarter. The aggregate
net proceeds to the Company totaled $194.5 million after selling expenses,
discounts and commissions. The Company used the net proceeds of the offering
to reduce its outstanding indebtedness to IBMCC.
Effective December 20, 1996, the Company established the Securitization
Facility, providing the Company with up to $175 million in available credit,
pursuant to which the Company, through a wholly-owned subsidiary, sells an
undivided percentage ownership interest in the Pooled Receivables. As of
April 30, 1997, the gross proceeds of the sales totaled $172.8 million.
The Company currently has a $250 million line of credit under its Financing
Program Agreement with IBMCC. At April 30, 1997, the Company had $171.4
million outstanding under this facility, of which $97.0 million is included
in accounts payable and $74.4 million is classified as short-term borrowings.
Borrowings under the line of credit are subject to certain borrowing base
limitations and are secured by portions of the Company's inventory, accounts
receivable and certain other assets. Amounts borrowed under the line of
credit bear interest at prime minus 0.8 % (7.7% at April 30, 1997). The line
of credit expires October 31, 1997.
In March 1996, the Company completed an initial public offering selling
9,215,770 shares of 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.
In January 1994, the Company sold certain assets and liabilities of its
U.S. franchise business for 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. In connection with this
sale and pursuant to a distribution and services agreement, the Company
continues to supply product for which it earns a monthly distribution fee.
Approximately 30% of the Company's inventory shipments by dollar volume are
made to fulfill the Company's obligation under the distribution services
agreement.
25
<PAGE>
During fiscal year 1997, exclusive of the proceeds of the sales of trade
receivables of $172.8 million, the Company's operating activities used cash
of $86.4 million primarily as a result of decreases in accounts payable and
accrued liabilities and increases in inventory. The decrease in accounts
payable and the increase in inventory was the result of the Company utilizing
certain cost effective purchasing programs and incentives offered by certain
of its vendors. The decrease in accrued liabilities was primarily the result
of payments against certain acquisition and other reserves. During fiscal
year 1997, the Company used cash of $36.0 million (net of cash acquired) to
purchase various businesses and used $13.5 million to make payments on
certain long-term obligations. During this period, the Company also used cash
of $25.2 million for capital expenditures and plans to make additional
investments in its automated systems and its capital equipment during fiscal
year 1998.
During fiscal year 1997, the Company acquired the Dataflex Regions for
$37.7 million in cash. In addition, a total of 300,000 shares of Company's
Common Stock (having an aggregate value on the closing date of approximately
$6.0 million) were issued in connection with the Company's acquisition of
Mentor Technologies. On December 16, 1996, the Company acquired CDS, in
exchange for 952,491 shares of the Company's Common Stock (having an
aggregate value on the closing date of approximately $21.9 million). Ten
percent of those shares were deposited into escrow for a period of
approximately 10 months to satisfy certain indemnification obligations of
CDS. In addition to these acquisitions, the Company continues to pursue the
acquisition of other companies that sell products and services that either
complement or expand its existing business. To that aim, on July 7, 1997, the
Company, through a wholly-owned subsidiary, acquired certain of the assets
and assumed certain of the liabilities of Sysorex Information Systems, Inc.,
a government technology provider which reported revenues of approximately
$150 million for its fiscal year ended September 30, 1996.
The Company intends to continue to finance a significant portion of its
working capital needs through credit facilities. The Company believes that
cash generated from operations and credit facilities will be sufficient to
meet its cash requirements and fund its planned growth through at least the
end of fiscal 1998.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders' of
Vanstar Corporation:
We have audited the accompanying consolidated balance sheets of Vanstar
Corporation as of April 30, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the
three years in the period ended April 30, 1997. Our audits also include the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vanstar
Corporation, at April 30, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years ended April 30,
1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
June 10, 1997, except for Note 15 as
to which the date is July 7, 1997
27
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
APRIL 30,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash $ 5,686 $ 14,498
Receivables, net of allowance for doubtful accounts of
$8,610 and $14,812 at April 30, 1997 and 1996, respectively 180,225 298,484
Inventories 389,592 350,406
Deferred income taxes 14,855 25,750
Prepaid expenses and other current assets 8,618 2,432
-------- --------
Total current assets 598,976 691,570
Property and equipment, net 39,240 23,183
Other assets, net 63,775 48,899
Goodwill, net of accumulated amortization of $5,640
and $3,453 at April 30, 1997 and 1996, respectively 56,652 39,713
-------- --------
$758,643 $803,365
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $255,147 $305,374
Accrued liabilities 34,392 41,586
Deferred revenue 21,821 27,109
Short-term borrowings 74,402 -
Current maturities of long-term debt 4,785 1,759
-------- --------
Total current liabilities 390,547 375,828
Long-term debt, less current maturities 5,946 293,007
Other long-term liabilities 661 7,477
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,518 -
Stockholders' equity:
Common stock; $.001 par value: 100,000,000 shares authorized,
42,896,779 shares issued and outstanding at April 30, 1997;
40,475,144 shares issued and outstanding at April 30, 1996 43 40
Additional paid-in capital 125,926 115,097
Retained earnings (since a deficit elimination of $78,448
at April 30, 1994) 41,002 11,916
-------- --------
Total stockholders' equity 166,971 127,053
-------- --------
$758,643 $803,365
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Product $ 1,849,365 $ 1,578,298 $ 1,187,392
Services 329,201 226,515 198,000
------------ ------------ ------------
Total revenue 2,178,566 1,804,813 1,385,392
------------ ------------ ------------
Cost of revenue:
Product 1,665,212 1,430,404 1,073,879
Services 199,390 129,482 100,975
------------ ------------ ------------
Total cost of revenue 1,864,602 1,559,886 1,174,854
------------ ------------ ------------
Gross margin 313,964 244,927 210,538
Selling, general and administrative expenses 245,685 201,880 182,411
------------ ------------ ------------
OPERATING INCOME 68,279 43,047 28,127
Interest income 3,685 5,539 6,577
Financing expenses, net (17,061) (35,804) (32,555)
------------ ------------ ------------
Income from continuing operations before income
taxes and distributions on preferred securities
of Trust 54,903 12,782 2,149
Income tax provision (19,765) (4,729) (881)
------------ ------------ ------------
Income from continuing operations before
distributions on preferred securities of Trust 35,138 8,053 1,268
Gain on disposal of discontinued businesses
(less income taxes of $5,400) - 9,194 -
Distributions on convertible preferred securities
of Trust
(less income taxes of $2,893) (5,144) - -
------------ ------------ ------------
NET INCOME $ 29,994 $ 17,247 $ 1,268
------------ ------------ ------------
------------ ------------ ------------
PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(PRO FORMA PRIOR TO MARCH 11, 1996):
Continuing operations $ 0.69 $ 0.23 $ 0.04
Discontinued operations - 0.27 -
------------ ------------ ------------
$ 0.69 $ 0.50 $ 0.04
------------ ------------ ------------
------------ ------------ ------------
Shares used in per share calculation 43,282 34,250 32,486
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK A COMMON STOCK B
---------------------- ---------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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 - -
Issuance of Common Stock:
Employee stock purchase plan - - 389 - - -
Exercise of options - - 597 1 - -
Business acquisitions - - 1,252 2 - -
Other - - 184 - - -
Income tax benefit from stock - - - - - -
option exercises
Unrealized holding gain on
available-for-sale securities - - - - - -
Net income - - - - - -
------- ------ ------ ---- ------ ----
BALANCE AT APRIL 30, 1997 - $ - 42,897 $43 - $ -
------- ------ ------ ---- ------ ----
------- ------ ------ ---- ------ ----
<CAPTION>
RETAINED
STOCKHOLDER EARNINGS
NOTE ADDTL. (ACCUM.
RECEIVABLE PAID-IN CAP. DEFICIT) TOTAL
----------- ------------ -------- -----
<S> <C> <C> <C> <C>
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
Issuance of Common Stock:
Employee stock purchase plan - 3,898 - 3,898
Exercise of options - 2,923 - 2,924
Business acquisitions - - (2,281) (2,279)
Other - 77 - 77
Income tax benefit from stock - 3,931 - 3,931
option exercises
Unrealized holding gain on
available-for-sale securities - - 1,373 1,373
Net income - - 29,994 29,994
---------- --------- ------ --------
BALANCE AT APRIL 30, 1997 $ - $125,926 $41,002 $166,971
---------- --------- ------ --------
---------- --------- ------ --------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------
1997 1996 1995
---------- --------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,994 $ 17,247 $ 1,268
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 17,068 9,775 9,997
Change in provision for doubtful accounts (7,780) 14,393 95
Deferred income taxes 19,548 10,029 (1,097)
Gain on disposal of discontinued businesses - (14,594) -
Changes in operating assets and liabilities:
Receivables 159,694 (51,193) (58,354)
Inventories (35,472) (51,720) (38,900)
Prepaid expenses and other assets (6,322) (2,462) (1,257)
Accounts payable (64,066) 42,177 37,556
Accrued and other liabilities (26,338) 4,865 1,070
---------- --------- -------
Total adjustments 56,332 (38,730) (50,890)
---------- --------- -------
Net cash provided by (used in) operating activities 86,326 (21,483) (49,622)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (25,224) (15,583) (12,835)
Proceeds from sale of building 3,125 - -
Purchase of businesses, net of cash acquired (36,011) - -
Sales of businesses - 14,594 -
Investment in available-for-sale securities (10,073) - -
Repayment of notes receivable - - 9,722
---------- --------- --------
Net cash used in investing activities (68,183) (989) (3,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (13,506) (7,836) (12,342)
Borrowings (repayments) under line of credit, net (214,670) (46,999) 73,287
Proceeds from issuance of convertible preferred
securities, net 194,320 - -
Issuance of common stock and warrants 6,901 84,044 -
Redemption of preferred stock and accrued dividends - - (4,654)
Dividends paid - - (1,000)
---------- --------- --------
Net cash provided by (used in) financing activities (26,955) 29,209 55,291
NET INCREASE (DECREASE) IN CASH (8,812) 6,737 2,556
Cash at beginning of the period 14,498 7,761 5,205
---------- --------- --------
CASH AT END OF THE PERIOD $ 5,686 $ 14,498 $ 7,761
---------- --------- --------
---------- --------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 17,075 $ 38,761 $ 31,352
Discounts and net expenses on receivable
securitization 3,275 - -
Distributions on preferred securities of Trust 6,943 - -
Income taxes, net of refunds 3,386 625 1,424
Non-cash investing activities:
Equipment acquired under capital leases 8,416 4,293 -
Non-cash financing activities:
Conversion of accrued dividends into a note payable - - 2,462
</TABLE>
See accompanying notes to consolidated financial statements
31
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1997
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 PC 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 PCs, network
products, computer peripherals and software from a variety of vendors. The
consolidated financial statements include the accounts of Vanstar Corporation
and its consolidated 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
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, 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.
FINANCIAL INSTRUMENTS
The carrying amounts for cash, receivables, and accounts payable
approximate their respective fair values due to the short-term maturity of
these instruments. The carrying value for amounts outstanding under the
Company's credit facility with IBMCC approximates fair value since the
facility bears interest at current market rates. Long-term debt consists of
variable-rate instruments at terms the Company believes would be available if
similar financing were obtained from another party. As such, carrying
amounts also approximate their fair value. The carrying value of the
Convertible Preferred Securities approximates its fair value based upon
quoted market prices.
INVENTORIES
Inventory for resale and spare parts inventory are stated at the lower
of cost (first-in, first-out method) or market. Periodically, the Company
assesses the appropriateness of the inventory valuations giving consideration
to obsolete, slow-moving and nonsalable inventory.
GOODWILL
Goodwill represents the excess of cost over the net assets of acquired
businesses and is amortized using the straight-line method over twenty to
twenty-five years. Amortization expense on goodwill was $2.2 million, $1.7
million, and $1.7 million for the fiscal years ended April 30, 1997, 1996,
and 1995, respectively. The
32
<PAGE>
carrying amount of goodwill was adjusted to fair value at April 30, 1994 in
connection with the Company's quasi-reorganization. The Company periodically
assesses the appropriateness of the carrying amount of goodwill and the
amortization periods based on the undiscounted value of the current and
anticipated future cash flows and projected profitability of the acquired
businesses. If there are indicated impairments, a write down is recorded to
the extent the carrying amount exceeds the fair value. The Company adopted
Financial Accounting Standards Board ("FASB") Statement No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, on May 1, 1996. The adoption of FASB Statement No. 121 did not
have any effect on the financial statements.
EARNINGS PER SHARE
Primary and fully diluted earnings per share are computed using the
weighted average number of shares of Common Stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents are
computed on the 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 within twelve months of the filing date of the Company's
initial public offering as if they were outstanding for all periods presented
using the treasury stock method and the initial public offering price.
Earnings per share for the fiscal years ended April 30, 1996 and 1995 are
presented giving effect to the conversion of all outstanding shares of
Preferred Stock into Common Stock and the exchange of all outstanding
warrants for shares of Common Stock in connection with the Company's initial
public offering on March 11, 1996 as if the conversion had occurred at the
later of the beginning of fiscal year 1995 or the issuance date of the
respective security.
STOCK-BASED COMPENSATION
The Company accounts for its stock option and employee stock purchase
plans in accordance with Accounting Principles Board ("APB") Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation
expense has been recognized because the options had an exercise price equal
to the market value of the Common Stock on the date of grant. Refer to Note
13 regarding pro forma information provided pursuant to FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued standards which
will be applicable to the Company but which the Company has not yet adopted:
FASB Statement No. 130, REPORTING COMPREHENSIVE INCOME and FASB Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
These statements are not expected to have a significant impact on the
financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted for
both interim and annual financial statements for periods ending after
December 15, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating earnings per share, the
effect of stock options which are dilutive will be excluded. The impact is
expected to result in an increase in primary earnings per share for the
fiscal years ended April 30, 1997 and April 30, 1996 of $0.03 and $0.03,
respectively. The Company has not yet determined what the impact of
Statement 128 will be on the calculation of fully diluted earnings per share.
2. ACQUISITIONS
On May 24, 1996, the Company, through a wholly-owned subsidiary, acquired
certain of the assets and assumed certain of the liabilities of Dataflex
Corporation and of Dataflex's wholly-owned subsidiary, Dataflex Southwest
Corporation. The assets acquired and liabilities assumed comprise
substantially all of the assets and business operations previously associated
with the business operations of Dataflex known as the Dataflex Western Region
and Dataflex Southwest Region (the "Dataflex Regions"). The Dataflex Regions
offered PC product distribution, service and support in the states of
Arizona, California, Colorado,
33
<PAGE>
Nevada, New Mexico, and Utah and reported revenues of approximately $145
million for the fiscal year ended March 31, 1996. The purchase price of the
Dataflex Regions, was $37.7 million.
On September 4, 1996, the Company acquired Mentor Technologies, Ltd., an
Ohio limited partnership ("Mentor Technologies") providing training and
education services throughout the upper mid-western United States. A total
of 300,000 shares of Company's Common Stock (having an aggregate value on the
closing date of approximately $6.0 million) were issued in connection with
the acquisition. For the calendar year ended December 31, 1995, Mentor
Technologies reported revenues of approximately $5.5 million.
On December 16, 1996, the Company acquired Contract Data Services, Inc., a
North Carolina corporation ("CDS"), in exchange for 952,491 shares of the
Company's Common Stock (having an aggregate value on the closing date of
approximately $21.9 million). Ten percent of those shares were deposited
into escrow to satisfy certain indemnification obligations of CDS. CDS
provided outsourcing of integrated information technology services, related
technical support services and procurement of computer hardware and software.
For the fiscal year ended March 31, 1996, CDS reported total revenues of
approximately $74.3 million.
On January 9, 1997, the Company acquired inventory and equipment from DCT
Systems, Inc., a Minnesota corporation, Niloy, Inc., a Georgia corporation,
and NCT Systems, Inc., an Illinois corporation (collectively, "DCT"). The
Company made an advance payment of $4.0 million towards the purchase price of
the assets pending subsequent determination of the value of such assets. In
addition, DCT could receive a maximum of 180,000 shares of the Company's
Common Stock upon the satisfaction of certain conditions. The Company also
entered into a servicing and marketing agreement on January 9, 1997 whereby
the Company will provide certain computer products and billing services to
DCT. Based upon certain criteria under the servicing and marketing
agreement, DCT also may receive, at their election, cash or up to 40,000
additional restricted shares of the Company's Common Stock.
The acquisitions of the Dataflex Regions and DCT were accounted for as
purchases and the excess cost over the fair value of net assets acquired for
each acquisition is being amortized on a straight line basis over a 25 year
period. The operations of these acquisitions are included in the
consolidated statements of income from the respective dates of acquisition.
The acquisitions of Mentor Technologies and CDS were accounted for as
pooling-of-interests business combinations. The consolidated statements of
income, cash flows, and stockholders' equity were not restated to reflect
these acquisitions due to the insignificance of the transactions.
Accordingly, the operations of these acquisitions are included in the
consolidated statements of income from the respective dates of acquisition.
3. DISCONTINUED OPERATIONS
On January 31, 1994, the Company sold certain assets and liabilities of its
U.S. franchise business, including all domestic franchise agreements, Datago
distribution agreements and the right to the "ComputerLand" name and
trademark within the United States to Merisel Franchise Aggregation Business
("Merisel FAB"), a wholly-owned subsidiary of Merisel, Inc. ("Merisel").
Concurrent with the sale, the Company entered into a distribution services
agreement with Merisel FAB. Pursuant to that agreement, the Company
continued to supply product and provide certain logistics and other support
services to Merisel FAB and received a monthly distribution fee for such
services. The Company also granted Merisel FAB $20.0 million in extended,
interest-bearing credit on its product purchases.
Effective January 31, 1996, the Company and Merisel FAB signed amendments
to the asset purchase agreement and distribution services agreement. The
amendments provided for: the term of the distribution services agreement to
be extended through April 30, 1997; the distribution fee to be reduced
retroactive to April 1, 1995; the additional consideration to be fixed at
$14.6 million; the maximum amount of the extended credit to be increased by
$11.1 million, which would be reduced in monthly installments from February
1996 through July 1997; and the original amount of interest-bearing credit of
$20.0 million to be extended and
34
<PAGE>
reduced in three equal monthly installments from May 15, 1997 through July
15, 1997. The Company recorded a gain of $9.2 million, net of applicable
taxes, for the year ended April 30, 1996 as a result of the additional
consideration. As a result of announcements made by Merisel on February 20,
1996, the Company decided to record a $31.1 million provision as of January
31, 1996 against its extended credit due from Merisel FAB. On May 29, 1996,
the Company entered into an agreement with a third party under which the
Company received $15.6 million in cash in exchange for providing the third
party the right to receive payments in May, June and July 1997 totaling $20.0
million out of amounts collected from the extended credit owed to the Company
by Merisel FAB. As a result, the Company adjusted a portion of the reserve
on its extended credit from Merisel FAB resulting in additional pre-tax
income of $15.6 million during the quarter ended April 30, 1996.
On March 28, 1997, the distribution and services agreement was assigned
from Merisel FAB to ComputerLand Corporation, a wholly owned subsidiary of
Synnex Information Technologies, Inc., as a result of the sale by Merisel of
substantially all of the assets of Merisel FAB to ComputerLand Corporation.
4. INVENTORIES
Inventories consist of the following:
APRIL 30,
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Inventory for resale $ 387,498 $ 348,419
Less reserve for obsolete inventory (13,420) (12,640)
---------- ----------
374,078 335,779
Spare parts (current) 15,514 14,627
---------- ----------
$ 389,592 $ 350,406
---------- ----------
---------- ----------
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
APRIL 30,
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Furniture and equipment $ 89,570 $ 57,093
Building and improvements 13,421 14,377
---------- ----------
102,991 71,470
Less accumulated depreciation and amortization (63,751) (48,287)
---------- ----------
$ 39,240 $ 23,183
---------- ----------
---------- ----------
The carrying value of property and equipment was adjusted to fair value on
April 30, 1994 in connection with the Company's quasi-reorganization.
Additions since April 30, 1994 have been recorded at cost. Property and
equipment is depreciated using the straight-line method over the estimated
useful lives of the related assets of 3 to 5 years for furniture and
equipment, 25 years for the building, and the lesser of the lease term or the
useful life for improvements. Depreciation expense associated with property
and equipment was $14.4 million, $7.7 million and $8.3 million for the fiscal
years ended April 30, 1997, 1996 and 1995, respectively.
35
<PAGE>
6. OTHER ASSETS, NET
Other assets consist of the following:
APRIL 30,
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Spare parts (non-current) $ 31,541 $ 28,883
Capitalized software, net 17,551 13,353
Available-for-sale security 10,719 -
Deferred income taxes (non-current) - 5,593
Other 3,964 1,070
---------- ----------
$ 63,775 $ 48,899
---------- ----------
---------- ----------
Capitalized software represents the costs associated with development of
software for the Company's internal use. Such costs are capitalized in
accordance with FASB Statement 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, 1997 and 1996 was $2.0 million and $1.5
million, respectively. Amortization expense associated with capitalized
software was $0.5 million, $0.3 million and $0.0 million for the fiscal years
ended April 30, 1997, 1996 and 1995, respectively.
In December 1996, the Company purchased 7.5% of the common stock of
ComputerLand Poland S.A., a publicly traded foreign company, for $8.5
million. The investment is classified as an "available-for sale" security in
accordance with FASB Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN
DEBT AND EQUITY SECURITIES. At April 30, 1997 the fair market value of the
investment was $10.7 million and the gross unrealized holding gain was $2.2
million for the year ended April 30, 1997. The net unrealized holding gain
of $1.4 million (net of taxes of $0.8 million) was included in retained
earnings. On April 30, 1997, the Company purchased additional restricted
common stock of ComputerLand Poland S.A. for $1.5 million. At April 30,
1997, the Company owns 8.9% of the common stock of ComputerLand Poland S.A.
7. LONG-TERM DEBT
Long-term debt consists of the following:
APRIL 30,
-------------------------
1997 1996
---------- ----------
(IN THOUSANDS)
Line of credit $ 74,402 $ 289,072
Obligations under capital leases 9,838 4,127
Other 893 1,567
---------- ----------
Total outstanding debt 85,133 294,766
Less current maturities (79,187) (1,759)
---------- ----------
$ 5,946 $ 293,007
---------- ----------
---------- ----------
The line of credit consists of amounts borrowed under a financing
agreement with IBMCC, an affiliate of one of the Company's principal vendors.
The line of credit is established for $250 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, 1997, the Company had $171.4 million outstanding
under this facility, of which $97.0 million is included in accounts payable
and $74.4 million is classified as short-term borrowings. Amounts borrowed
under the line of credit bear interest at 7.7 % at April 30, 1997 and 8.7% at
April 30, 1996.
36
<PAGE>
Aggregate maturities of long-term debt, excluding the line of credit,
are approximately $4.8 million, $4.7 million, and $1.2 million, respectively
for each of the succeeding three years, and none thereafter.
8. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established a revolving funding
trade receivables securitization facility (the "Securitization Facility")
which provides the Company with up to $175 million in available credit. In
connection with the Securitization Facility, the Company sells on a revolving
basis, certain of its trade receivables ("Pooled Receivables") to the special
purpose corporation which in turn sells a percentage ownership interest in
the Pooled Receivables to a commercial paper conduit sponsored by a financial
institution. These transactions have been recorded as a sale in accordance
with FASB Statement No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF
FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. The amount of the
Pooled Receivables, which totaled $246.3 million at April 30, 1997, is
reflected as a reduction to receivables. The Company retains an interest in
certain of the assets sold. At April 30, 1997, the amount of that retained
interest totaled $82.8 million and is included in receivables. The Company
is retained as servicer of the Pooled Receivables. Although management
believes that the servicing revenues earned will be adequate compensation for
performing the services, estimating the fair value of the servicing asset was
not considered practicable. Consequently, a servicing asset has not been
recognized. The gross proceeds resulting from the sale of the percentage
ownership interests in the Pooled Receivables totaled $172.8 million as of
April 30, 1997. Such proceeds are included in cash flows from operating
activities in the consolidated statements of cash flows. Discounts and net
expenses associated with the sales of the receivables totaling $3.4 million
are included in financing expenses, net on the consolidated statements of
income for the year ended April 30, 1997.
9. CONVERTIBLE PREFERRED SECURITIES OF TRUST
During October 1996, Vanstar Financing Trust, a Delaware statutory
business trust wholly-owned by the Company (the "Trust"), sold 4,025,000
Trust Convertible Preferred Securities ("Convertible Preferred Securities").
The Convertible Preferred Securities have a liquidation value of $50 per
security and are convertible at any time at the option of the holder into
shares of the Company's Common Stock at a conversion rate of 1.739 shares for
each Convertible Preferred Security subject to adjustment in certain
circumstances. Distributions on Convertible Preferred Securities accrue at an
annual rate of 6 3/4% of the liquidation value of $50 per Convertible
Preferred Security and are included in "Distributions on convertible
preferred securities of trust, net of tax" in the consolidated statements of
income. The proceeds of the private placement, which totaled $194.5 million
(net of initial purchasers' discounts and estimated offering expenses
totaling $6.7 million) are included in "Company-obligated mandatorily
redeemable convertible preferred securities of subsidiary trust holding
solely convertible subordinated debt securities of the Company" on the
consolidated balance sheets. The Company has entered into several
contractual arrangements (the "Back-up Undertakings") for the purpose of
fully and unconditionally supporting the Trust's payment of distributions,
redemption payments and liquidation payments with respect to the Convertible
Preferred Securities. Considered together, the Back-up Undertakings
constitute a full and unconditional guarantee by the Company of the Trust's
obligations on the Convertible Preferred Securities.
The Trust invested the proceeds of the offering in 6 3/4% Convertible
Subordinated Debentures due 2016 (the "Debentures") issued by the Company.
The Debentures bear interest at 6 3/4% per annum, generally payable
quarterly on January 1, April 1, July 1 and October 1. The Debentures are
redeemable by the Company, in whole or in part, on or after October 5, 1999
at designated redemption prices. If the Company redeems the Debentures, the
Trust must redeem the Convertible Preferred Securities on a pro rata basis
having an aggregate liquidation value equal to the aggregate principal amount
of the Debentures redeemed. The sole assets of the Trust are the Debentures,
which have an aggregate principal amount of $207.5 million. The Debentures
and related income statement effects are eliminated in the Company's
consolidated financial statements.
37
<PAGE>
10. CONCENTRATION OF CREDIT RISK
The Company purchases and sells multi-vendor PC products and provides
various PC-related services to end-users. Although receivables from
end-users are uncollateralized, the credit risk is limited due to the large
number and diversity of customers comprising the Company's customer base.
The Company also distributes PC products under a distribution and services
agreement with ComputerLand Corporation pursuant to which the Company
generally receives payment within three business days. No single customer
accounted for more than 10% of the Company's revenue during fiscal year 1997.
During fiscal year 1996 and 1995, no customer other than the Microsoft
Corporation accounted for more than 10% of the Company's total revenues.
Revenues from the Microsoft Corporation represented 12.0% and 10.8% of the
Company's total revenues for fiscal year 1996 and 1995, respectively.
11. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain administrative, warehousing and other facilities
under operating leases, and equipment under a combination of operating and
capital leases. Most of the Company's 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, 1997 are as follows:
MINIMUM MINIMUM
LEASE SUBLEASE
PAYMENTS INCOME
------------------------
(IN THOUSANDS)
Year Ending April 30,
1998 17,321 707
1999 14,091 129
2000 9,151 -
2001 6,435 -
2002 5,321 -
Thereafter 19,287 -
--------- ------
$ 71,606 $ 836
--------- ------
--------- ------
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, 1997 was
approximately $1.7 million, which has not reduced the amounts shown above.
Rental expense, under operating leases, charged to operations was $19.4
million, $13.8 million and $14.2 million during fiscal years ended April 30,
1997, 1996 and 1995, respectively.
The cost of assets recorded under capital leases was $12.7 million and $4.5
million at April 30, 1997 and 1996, respectively. Accumulated amortization
on such assets was $3.3 million and $0.5 million at April 30, 1997 and 1996,
respectively. The present value of minimum lease payments under capital
leases as of April 30, 1997 was $9.8 million.
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.
38
<PAGE>
12. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On March 11, 1996, the Company completed an initial public offering selling
9,215,770 shares of its Common Stock for approximately $83.4 million, net of
issuance costs.
PREFERRED STOCK, COMMON STOCK AND WARRANTS
Concurrent with the consummation of the initial public offering, all
outstanding shares of Senior Preferred Stock, Class F Preferred Stock and
Class B Common Stock were converted into 19,018,088 shares of Common Stock.
Additionally, all outstanding warrants were exchanged for 4,995,691 shares of
Common Stock, all accrued dividends payable to the holder of the Senior
Preferred Stock totaling $6.2 million were forgiven and all such stock and
warrants converted to Common Stock were canceled.
As of April 30, 1997, the Company had 15,000,000 shares of undesignated
Preferred Stock, $0.01 par value, authorized. No shares have been issued.
At April 30, 1997, the Company had 7,943,551 shares of Common Stock
reserved for future issuance for the Company's stock option and stock
purchase plans.
13. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
The Company has three stock option plans which provide for the issuance of
incentive stock options ("ISOs"), stock options that are non-qualified for
Federal income tax purposes ("NQSOs") and stock appreciation rights ("SARs").
The 1988 Stock Option Plan was adopted in July 1988 and provides for the
issuance of ISOs, NQSOs and SARs to key employees and directors. The 1993
Stock Option Plan was adopted in April 1993 and provides for the issuance of
shares of Common Stock, ISOs, NQSOs and SARs to highly compensated,
managerial employees, officers and directors. The 1996 Stock Option Plan was
adopted in August 1996 and provides for the issuance of shares of Common
Stock, ISOs, NQSOs and SARs to officers, directors and employees of, and
consultants to, the Company. The exercise price of the ISOs under all plans
may not be less than 100% of the fair market value of the Common Stock at the
time of grant. Under the 1993 plan, the exercise price of the NQSOs may not
be less than 85% of the fair market value at the time of grant. At April 30,
1997, the total number of shares of Common Stock for which options may be
granted pursuant to the 1988, 1993, and 1996 plans were 2.3 million, 2.4
million and 3.3 million, respectively. Under all plans, options generally
become exercisable ratably over a four or five year period and expire in ten
years. At April 30, 1997, no SARs had been issued.
A summary of the Company's stock option activity, and related information
for the fiscal years ended April 30, 1997, 1996 and 1995 are as follows (In
thousands, except for weighted-average exercise prices):
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 3,817 $ 4.62 2,161 $ 5.71 1,418 $ 5.55
Granted 1,557 14.22 2,967 4.35 883 6.00
Exercised (597) 4.87 (26) 5.83 - -
Canceled (307) 6.07 (1,285) 5.80 (140) 5.93
----- ------ -----
Outstanding-end of year 4,470 $ 7.83 3,817 $ 4.62 2,161 $ 5.71
----- ------ -----
----- ------ -----
Exercisable at end of year 1,721 1,403 1,265
Shares available for grant 2,858 1,112 117
</TABLE>
39
<PAGE>
The following summarizes information about the Company's stock options
outstanding and exercisable by price range at April 30, 1997 (options in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------- ---------------------------------
WEIGHTED-AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.18 - $ 3.00 1,874 8 $ 2.96 656 $ 2.90
5.00 - 10.00 1,319 7 7.64 797 6.90
14.75 - 23.87 1,277 9 15.16 268 15.14
----- -----
$ 0.18 - $23.87 4,470 8 $ 7.83 1,721 $ 6.66
----- -----
----- -----
</TABLE>
STOCK PURCHASE PLAN
The Company provides an employee stock 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. During fiscal year 1997, the Company sold
389,245 shares of Common Stock under the Stock Purchase Plan to its employees.
PRO FORMA INFORMATION
The Company has elected to follow APB Opinion No. 25 and related
interpretations, and accordingly, has not recognized compensation expense for
its employee stock options because all options had an exercise price equal to
the market value of the Common Stock on the date of grant.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, and has been determined as if the Company
had accounted for its stock options and employee stock purchase plan under
the fair value method of that Statement.
Pro forma net income, earnings per share and compensation expense are as
follows:
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income As reported $29,994 $17,247
Pro forma $23,926 $15,119
Primary and fully diluted As reported $ 0.69 $ 0.50
earnings per share Pro forma $ 0.56 $ 0.45
Compensation expense Pro forma $ 8,555 $ 3,221
For purposes of pro forma disclosures only, the estimated fair value of the
options is amortized to expense over the options' vesting period. The fair
value for all options was estimated at the date of grant using the
Black-Scholes multiple option pricing model with the following assumptions:
risk-free interest rates of 6.2% for fiscal year 1997 and 6.0% for fiscal
year 1996; volatility factors of the expected market price of the Company's
Common Stock of 71%; expected dividend yield of 0.0%; and expected life of 2
years. The per
40
<PAGE>
share weighted-average fair value of options granted was $8.09 during fiscal
year 1997 and $2.55 during fiscal year 1996. Pro forma net income reflects
only options granted in fiscal year 1997 and 1996. Therefore, the impact of
calculating compensation cost for stock options will not be fully reflected
in the pro forma net income and pro forma earnings per share amounts until
fiscal year 2000.
For purposes of pro forma disclosures only, compensation cost associated
with the Stock Purchase Plan is estimated for the fair value of the
employees' purchase rights using the Black-Scholes model with the following
assumptions: risk-free interest rates of 5.3% for fiscal year 1997 and 5.4%
for fiscal year 1996; expected volatility of 58% for fiscal year 1997 and 72%
for fiscal year 1996; expected dividend yield of 0.0%; and expected life of 6
months. The weighted-average fair value per share of those purchase rights
granted in fiscal year 1997 and 1996 was $2.94 and $2.12, respectively.
The Black Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. Option valuation models required
the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
401K PLAN
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 the maximum allowed by the Internal Revenue Code. Prior to August 1,
1996, the Company matched 100% of certain eligible employee contributions up
to $200 not to exceed the maximum of 1% of the employee's eligible
compensation. If the employee contributed more than $200 to the plan, the
Company contributed an amount equal to the greater of $200 or 25% of the
employee's contribution up to a maximum of 1% of the employee's eligible
compensation. The amount charged to expense for the matching contribution was
$1.3 million, $0.7 million and $0.7 million, for the fiscal years ended April
30, 1997, 1996 and 1995, respectively. Effective August 1, 1996, the Company
changed its matching policy to 50% on the first 4% of eligible compensation
contributed by an eligible employee up to a maximum of 2% of the employee's
eligible compensation.
14. INCOME TAXES
The income tax provision computed under FASB Statement No. 109, ACCOUNTING
FOR INCOME TAXES, consists of the following:
YEAR ENDED APRIL 30,
------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Current:
Federal $ 623 $ - $ -
State 100 100 200
------- ------- ----
723 100 200
------- ------- ----
Deferred
Federal 14,319 8,561 562
State 1,830 1,468 119
------- ------- ----
16,149 10,029 681
------- ------- ----
$16,872 $10,129 $881
------- ------- ----
------- ------- ----
41
<PAGE>
The income tax provision is allocated between discontinued and continuing
operations as follows:
YEAR ENDED APRIL 30,
------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Provision allocated to operations of
discontinued businesses and income on
disposal of discontinued businesses $ - $5,400 $ -
------- ------ ----
------- ------ ----
Income tax provision allocated to
continuing operations $16,872 $4,729 $881
------- ------ ----
------- ------ ----
The income tax provision allocated to continuing operations for the
fiscal year ending April 30, 1997 consists of the following (In thousands):
Provision on income before taxes and
distribution on preferred securities
of Trust $19,765
Tax benefit allocable to distribution
on preferred securities of Trust (2,893)
-------
$16,872
-------
-------
Significant components of deferred tax assets consist of the following:
APRIL 30,
----------------------
1997 1996
---- ----
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards $ 1,490 $ 13,926
Reserves 8,237 10,971
Inventory 5,128 6,446
-------- ---------
Total net deferred tax assets $ 14,855 $ 31,343
-------- ---------
-------- ---------
The net operating loss carryforwards listed above expire in the years 2000
through 2010.
The full realization of the $14.9 million of deferred tax assets carried at
April 30, 1997 is dependent upon the Company achieving sufficient future
pretax earnings. Although realization is not assured, management believes
that sufficient taxable income will be generated through operations to
realize the net deferred tax assets.
A reconciliation of the U.S. statutory income tax rate and the effective
rate of the income tax provision allocated to continuing operations is as
follows:
YEAR ENDED APRIL 30,
--------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Statutory tax rate at 35% $ 16,403 $ 4,473 $ 752
State income taxes, net of
federal benefit 1,930 536 108
Other (1,461) (280) 21
--------- -------- ------
$ 16,872 $ 4,729 $ 881
--------- -------- ------
--------- -------- ------
42
<PAGE>
15. SUBSEQUENT EVENTS
On July 7, 1997, the Company, through a wholly-owned subsidiary, acquired
certain of the assets and assumed certain of the liabilities of Sysorex
Information Systems, Inc. ("Sysorex"), a government technology provider which
reported revenues of approximately $150 million for its fiscal year ended
September 30, 1996. The purchase price was approximately $46.0 million,
subject to certain post-closing adjustments, and a contingent payment of
500,000 shares of Common Stock, based upon the future financial performance
of the acquired business. The Company anticipates accounting for the
acquisition using the purchase method.
On July 3, 1997, a purported class action suit was filed against the
Company and other various parties. The Company believes that the plaintiff's
allegations are without merit and intends to defend the suit vigorously. At
this time, the Company is unable to determine what impact this matter may
have upon its financial condition or results of operations.
43
<PAGE>
SCHEDULE II
VANSTAR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
(REDUCTIONS)
BALANCE AT CHARGED BALANCE AT
BEGINNING OF (CREDITED) TO COSTS WRITE-OFFS/ END OF
ALLOWANCE FOR DOUBTFUL ACCOUNTS PERIOD AND EXPENSES OTHER PERIOD
- ------------------------------- ------ ------------ ----- ------
<S> <C> <C> <C> <C>
Year ended April 30, 1995 $14,098 $ 95 $ 1,867 $12,326
Year ended April 30, 1996 12,326 14,393 * 11,907 ** 14,812
Year ended April 30, 1997 14,812 (2,705)*** 3,497 8,610
INVENTORY RESERVES
- ------------------
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
Year ended April 30, 1997 12,640 2,300 1,520 13,420
</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 note 3 of notes to consolidated financial statements).
** Includes the write-off of $4.4 million of the extended interest-bearing
credit due from Merisel FAB.
*** Includes the reversal of $4.2 million of provisions against the extended
interest-bearing credit due from Merisel FAB.
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the headings "Election of Directors," "Executive
Officers," and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the 1997 Proxy Statement is incorporated herein by reference in response to
this item. Certain information regarding executive officers of the Company
is set forth under the heading "Executive Officers of the Company" in Part 1
of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The material under the heading "Executive Compensation" in the 1997
Proxy Statement is incorporated herein by reference in response to this item,
except for the material under the subheadings "Compensation and Stock Option
Committee Report on Executive Compensation" and "Comparison of Cumulative
Total Returns," which are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The material under the heading "Security Ownership of Certain Beneficial
Owners, Directors and Management" in the 1997 Proxy Statement is incorporated
herein by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The material under the heading "Certain Transactions" in the 1997 Proxy
Statement is incorporated herein by reference in response to this item.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets at April 30, 1997 and 1996
Consolidated Statements of Income for the years ended April 30,
1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years
ended April 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule:
Supplemental Schedule II - Valuation of Qualifying Accounts
and Reserves
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant (1)
4.1 Certificate of Trust of Vanstar Financing Trust (4)
4.2 Amended and Restated Declaration of Trust of Vanstar Financing
Trust dated as of October 2, 1996, among Jeffrey S. Rubin,
Leslie J. Alvarez, John J. Dunican, Jr. and Wilmington Trust
Company as trustees and Vanstar Corporation as sponsor (4)
4.3 Indenture dated as of October 2, 1996 between Vanstar Corporation
as issuer and Wilmington Trust Company as trustee (4)
4.4 Form of 6 3/4% Preferred Securities (4) (incorporated by
reference to Exhibit A-1 to Exhibit 4.2)
4.5 Form of 6 3/4% Convertible Subordinated Debentures Due 2016 (4)
(incorporated by reference to Exhibit B to Exhibit 4.2)
4.6 Preferred Securities Guarantee Agreement dated October 2, 1996
between Vanstar Corporation as guarantor and Wilmington Trust
Company as preferred guarantee trustee (4)
***10.1 Form of Indemnity Agreement between the Company and each of its
directors and certain officers (1)
10.2 Second Amended and Restated Financing Program Agreement dated
April 30, 1995, between the Registrant and IBM Credit Corporation
("IBMCC"), as amended (1)
**10.3 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)
46
<PAGE>
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)
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 Agreement, dated May 29, 1996, between the Registrant and
Donaldson Lufkin & Jenrette Securities Corporation (3)
10.13 Agreement for Purchase and Sale of Property dated June 3, 1996
entered into between the Registrant and Duke Realty Limited
Partnership (5)
10.14 Lease Agreement dated as of June 3, 1996 entered into between the
Registrant and Duke Realty Limited Partnership (5)
10.15 Lease Agreement dated as of May 30, 1996 entered into between the
Registrant and Dugan Realty, L.L.C. (5)
10.16 Lease Agreement dated as of June 3, 1996 entered into between the
Registrant and Duke Realty Limited Partnership (5)
10.17 Lease Amendment dated May 15, 1996 entered into between the
Registrant and Rosewood Associates (5)
10.18 Asset Purchase Agreement by and among the Registrant, VST West,
Inc. and Dataflex Corporation and Dataflex Southwest Corporation,
dated as of May 24, 1996 (2)
***10.19 1988 Stock Option Plan (1) (incorporated by reference to Exhibit
4.1)
***10.20 Form of Nontransferable Non-Qualified Stock Option Agreement
under the 1988 Stock Option Plan of the Registrant (1)
(incorporated by reference to Exhibit 4.2)
***10.21 1993 Stock Option/Stock Issuance Plan (1) (incorporated by
reference to Exhibit 4.3)
***10.22 Form of Stock Option Grant and Stock Purchase Agreement under the
1993 Stock Option Plan (1) (incorporated by reference to
Exhibit 4.4)
10.23 Employee Stock Purchase Plan (1) (incorporated by reference to
Exhibit 4.5)
***10.24 1996 Stock Option/Stock Issuance Plan, as amended (4)
(incorporated by reference to Exhibit 10.25)
10.25 Amendment No. 5 to Second Amended and Restated Financing Program
Agreement, dated September 25, 1996, between the Registrant and
IBMCC (6)
10.26 Amendment No. 6 to Second Amended and Restated Financing Program
Agreement, dated December 20, 1996, between the Registrant and
IBMCC (7) (incorporated by reference to Exhibit 10.3)
10.27 Receivables Purchase Agreement, dated December 20, 1996, among
Vanstar Finance Co., as seller, the Registrant, as servicer,
Pooled Accounts Receivable Capital Corporation, as purchaser, and
Nesbitt Burns Securities, Inc., as agent (7) (incorporated by
reference to Exhibit 10.1)
10.28 Purchase and Contribution Agreement, dated as of December 20,
1996, between the Registrant and Vanstar Finance Co. (7)
(incorporated by reference to Exhibit 10.2)
10.29 Intercreditor Agreement, dated as of December 20, 1996, among
PAR Accounts Receivable Capital Corporation, the Registrant,
Vanstar Finance Co., and Nesbitt Burns Securities, Inc. (7)
(incorporated by reference to Exhibit 10.4)
*10.30 Assignment, Consent to Assignment and Assumption, and Release
Agreement, dated as of March 28, 1997, by and among the
Registrant, Merisel, Inc., Merisel FAB, Inc., and ComputerLand
Corporation
****10.31 Amendment No. 15, dated as of March 28, 1997, to Distribution and
Services Agreement between the Registrant and ComputerLand
Corporation
*11.1 Statement of Computation of Earnings Per Share
*21 List of Subsidiaries
*23 Consent of Ernst & Young LLP
*27 Financial Data Schedule
47
<PAGE>
(1) Incorporated by reference to exhibits with the corresponding
numbers (except as otherwise noted) filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-80297) as
declared effective by the Commission on March 8, 1996.
(2) Incorporated by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated May 24, 1996.
(3) Incorporated by reference to Exhibit 10 to the Registrant's
Current Report on Form 8-K dated May 29, 1996.
(4) Incorporated by reference to exhibits with the corresponding
numbers (except as otherwise noted) filed with that Registration
Statement on Form S-1 (Reg. Nos. 333-16307 and 333-16307-01)
filed by the Registrant and Vanstar Financing Trust, as
declared effective by the Commission on January 15, 1997.
(5) Incorporated by reference to exhibits with the corresponding
numbers filed with the Registrant's Annual Report on Form 10-K
for the fiscal year ended April 30, 1996.
(6) Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1996.
(7) Incorporated by reference to exhibits with the indicated numbers
filed with the Registrant's Current Report on Form 8-K
dated December 26, 1996 and filed with the Commission on January
10, 1997.
* Filed herewith.
** 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 of 1933, as amended.
*** Management contract or compensatory plan or arrangement.
**** Filed herewith; however, portions of this Exhibit have been omitted
and filed separately with the Secretary of the Commission pursuant
to the Registrant's Application Requesting Confidential Treatment
under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed by the Company during the fiscal
quarter ended April 30, 1997.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VANSTAR CORPORATION
(Registrant)
Dated: July 21, 1997 By: /s/ WILLIAM Y. TAUSCHER
----------------------------
William Y. Tauscher
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATED
--------- ----- -----
<S> <C> <C>
/s/ WILLIAM Y. TAUSCHER Chairman of the Board, Chief Executive Officer July 21, 1997
- --------------------------- and Director (Principal Executive Officer)
William Y. Tauscher
/s/ KAUKO O. ARONAHO Senior Vice President and Chief Financial Officer July 21, 1997
- --------------------------- (Principal Financial and Accounting Officer)
Kauko O. Aronaho
/s/ JAY S. AMATO President, Chief Operating Officer and Director July 21, 1997
- ---------------------------
Jay S. Amato
/s/ JOHN W. AMERMAN Director July 21, 1997
- ---------------------------
John W. Amerman
/s/ RICHARD H. BARD Director July 21, 1997
- ---------------------------
Richard H. Bard
/s/ STEPHEN W. FILLO Director July 21, 1997
- ---------------------------
Stephen W. Fillo
/s/ STEWART K.P. GROSS Director July 21, 1997
- ---------------------------
Stewart K.P. Gross
/s/ WILLIAM H. JANEWAY Director July 21, 1997
- ---------------------------
William H. Janeway
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATED
--------- ----- -----
<S> <C> <C>
/s/ JOHN R. OLTMAN Director July 21, 1997
- ---------------------------
John R. Oltman
/s/ JEFFREY S. RUBIN Director July 21, 1997
- ---------------------------
Jeffrey S. Rubin
/s/ JOHN L. VOGELSTEIN Director July 21, 1997
- ---------------------------
John L. Vogelstein
/s/ JOSH S. WESTON Director July 21, 1997
- ---------------------------
Josh S. Weston
</TABLE>
50
<PAGE>
Exhibit 10.30
ASSIGNMENT, CONSENT TO ASSIGNMENT AND ASSUMPTION,
AND RELEASE AGREEMENT (the "Assignment Agreement")
dated as of March 28 31, 1997 by and among VANSTAR
CORPORATION, a Delaware corporation ("VANSTAR"),
MERISEL, INC., a Delaware corporation ("MERISEL"),
MERISEL FAB, INC., a Delaware corporation ("FAB"),
and COMPUTERLAND CORPORATION, a California
corporation ("COMPUTERLAND").
R E C I T A L S
a. VANSTAR and FAB are parties to a Distribution and Services Agreement
dated January 31, 1994 (the "Services Agreement"). The Services Agreement
has been amended by the parties from time to time, and most recently by
Amendment No. 14 dated December 16, 1996. FAB's obligations under the
Services Agreement are guaranteed by MERISEL pursuant to the terms of a
Guaranty Agreement dated as of January 31, 1994 (the "Merisel Guaranty").
b. FAB desires to sell and assign substantially all of its assets to
COMPUTERLAND, a California corporation wholly-owned by SYNNEX Information
Technologies, Inc., a California corporation ("SYNNEX") and COMPUTERLAND
desires to assume certain of the liabilities of FAB (the "Acquisition"). The
Acquisition is conditioned on the assignment of the Services Agreement from
FAB to COMPUTERLAND, VANSTAR's consent to such assignment, and the amendment
of the Services Agreement on terms acceptable to SYNNEX and COMPUTERLAND.
c. VANSTAR transferred certain rights concerning the payment of the
Extended Payment Obligation arising under the terms of the Services Agreement
as collateral securing the payment of a loan (as that term is defined in
Section 2(a) of the Loan and Security Agreement dated as of May 29, 1996 (the
"Loan Agreement")) made to Vanstar by Donaldson Lufkin & Jenrette Securities
Corporation ("DLJ") under the Loan Agreement. BankAmerica Investment
Corporation ("BankAmerica") has represented that it is the beneficial owner
of all rights of DLJ under the Loan Agreement, and BankAmerica and SYNNEX
Information Technologies, Inc. ("SYNNEX") have entered into a letter
agreement dated March 25, 1997 concerning the assumption and satisfaction of
the Extended Payment Obligation by COMPUTERLAND or SYNNEX (the "BankAmerica
Letter Agreement"). The BankAmerica Letter Agreement provides for, among
other things, the written release by BankAmerica of any and all claims
against
<PAGE>
Vanstar and of the security interest granted by VANSTAR in connection with
the Loan Agreement.
d. VANSTAR desires to consent to the assignment of the Services
Agreement, provided that (i) the Extended Payment Amount arising under the
terms of the Services Agreement is satisfied in full on the terms set forth
in the BankAmerica Letter Agreement; (ii) the Services Agreement is otherwise
amended on terms acceptable to COMPUTERLAND and VANSTAR; and (iii) that it be
released by FAB from certain obligations arising under the Services Agreement
as hereinafter set forth. FAB also desires that it be released from certain
of its obligations under the Services Agreement.
NOW, THEREFORE, for good and valuable consideration, the parties do
hereby agree as follows:
1. ASSIGNMENT OF SERVICES AGREEMENT. On satisfaction of the conditions
set forth in paragraph 3 below, and for valuable consideration, receipt of
which is acknowledged, FAB hereby assigns and transfers to COMPUTERLAND all
of FAB's right, title and interest in and to the Services Agreement, and
COMPUTERLAND agrees to and accepts the assignment. COMPUTERLAND expressly
assumes and agrees to keep, perform and fulfill, after the date hereof, all
the terms, covenants, conditions and obligations required to be kept,
performed and fulfilled by FAB under the Services Agreement. COMPUTERLAND
also acknowledges its assumption of trade accounts payable to VANSTAR in the
sum of $8,665,426.
2. CONSENT TO ASSIGNMENT. On satisfaction of the conditions set forth
in Paragraph 3 below, and subject to the Release set forth in paragraph 5
below and the Acknowledgment in Paragraph 6 below, VANSTAR consents to the
assignment of the Services Agreement from FAB to COMPUTERLAND, and hereby
releases FAB from any further liability or obligation under the Services
Agreement arising out of or related to the Services Agreement after such
assignment. VANSTAR also consents to the assumption of $8,665,426 of the FAB
trade accounts payable to VANSTAR by COMPUTERLAND.
3. CONDITIONS. The assignment by FAB, COMPUTERLAND's acceptance of the
assignment, and VANSTAR's consent to such assignment and conditioned on
satisfaction of each of the following conditions:
a. The satisfaction of the Extended Payment Amount ($20,000,000),
arising under the terms of the Services Agreement, on the terms set forth in
the BankAmerica Letter Agreement ; and
b. [INTENTIONALLY DELETED]
c. The execution and delivery by COMPUTERLAND and VANSTAR of Amendment
No. 15 to the Services Agreement, in the form attached hereto as Exhibit A;
and
2
<PAGE>
d. The execution and delivery by SYNNEX to VANSTAR of the Guaranty
Agreement, in the form attached hereto as Exhibit B.
4. RELEASE BY VANSTAR.
a. VANSTAR and its subsidiary organizations, affiliates, partners,
agents, servants, stockholders, employees, representatives, assigns and
successors hereby fully releases and discharges MERISEL and FAB, and their
parent and subsidiary organizations, affiliates, partners, agents, servants,
stockholders, employees, representatives, assigns and successors, from and
relinquishes all rights, claims, demands, causes of action, damages, costs,
expenses, attorneys' fees, and obligations of any nature, known or unknown,
in law or in equity, which it now has or may have after execution of this
agreement against MERISEL or FAB, ARISING OUT OF OR RELATED TO THE SERVICES
AGREEMENT OR THE GUARANTY AGREEMENT, OTHER THAN THOSE ITEMS LISTED ON
SCHEDULE A HERETO.
b. VANSTAR acknowledges and agrees that this release applies to all
claims for injuries, damages, or losses to VANSTAR (whether those injuries,
damages, or losses are known or unknown, foreseen or unforeseen, or patent or
latent) that VANSTAR may have against FAB or MERISEL ARISING OUT OF OR
RELATED TO THE SERVICES AGREEMENT, OTHER THAN THOSE ITEMS LISTED ON SCHEDULE
A HERETO, and VANSTAR hereby waives application of California Civil Code
Section 1542. VANSTAR certifies that it has read the following provisions of
California Civil Code Section 1542:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
c. Notwithstanding the release set forth above, nothing in this
Agreement shall release, discharge or otherwise impair VANSTAR's right to
implead or pursue any legal or equitable action against MERISEL or FAB with
respect to third party claims brought against VANSTAR for which VANSTAR would
have had a claim for indemnification, equitable indemnity, or other claim
against MERISEL or FAB.
5. RELEASE BY MERISEL AND FAB.
a. MERISEL and FAB and their subsidiary organizations, affiliates,
partners, agents, servants, stockholders, employees, representatives, assigns
and successors hereby fully releases and discharges VANSTAR, and its parent
and subsidiary organizations, affiliates, partners, agents, servants,
stockholders, employees, representatives, assigns and successors, from and
relinquishes all rights, claims, demands, causes of action, damages, costs,
expenses, attorneys' fees, and obligations of any nature, know or unknown, in
law or in equity, which they now have or may have after execution of this
agreement against
3
<PAGE>
VANSTAR, ARISING OUT OF OR RELATED TO THE SERVICES
AGREEMENT OTHER THAN THOSE ITEMS LISTED ON SCHEDULE B HERETO.
b. MERISEL and FAB acknowledge and agree that this release applies to
all claims for injuries, damages, or losses to MERISEL and FAB (whether those
injuries, damages, or losses are known or unknown, foreseen or unforeseen, or
patent or latent) that MERISEL and FAB may have against VANSTAR ARISING OUT
OF OR RELATED TO THE SERVICES AGREEMENT OTHER THAN THOSE ITEMS LISTED ON
SCHEDULE B HERETO, and MERISEL and FAB hereby waive application of California
Civil Code Section 1542. MERISEL and FAB certify that they have read the
following provisions of California Civil Code Section 1542:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
c. Notwithstanding the release set forth above, nothing in this
Agreement shall release, discharge or otherwise impair MERISEL's or FAB's
right to implead or pursue any legal or equitable action against VANSTAR with
respect to third party claims brought against MERISEL or FAB for which
MERISEL or FAB would have had a claim for indemnification, equitable
indemnity, or other claim against VANSTAR.
d. Notwithstanding the release set forth above, nothing in this
Agreement shall release, discharge or otherwise impair Vanstar's obligation
under the Services Agreement to continue to assist FAB, ComputerLand or its
customers in the process of submitting and collecting from vendors claims for
MDF, price protection, rebate and vendor credit memos on behalf of FAB,
ComputerLand and their customers. Additionally, Vanstar will continue to
assist FAB, ComputerLand and their customers in the submission and collection
of claims from vendors for MDF, price protection, rebate and vendor credit
memos where FAB, ComputerLand or their customer had not originally submitted
the claim properly or at all.
4. Acknowledgment. The parties hereto agree that (i) the items listed
on Schedule A shall remain the obligations of FAB and MERISEL after the date
hereof, (ii) the amounts owing, if any, pursuant to the items designated as
numbers 1 and 2 of Schedule B shall be paid by VANSTAR to FAB, and (iii) the
amounts owing, if any, pursuant to items 3, 4, and 5 of Schedule B shall be
paid by VANSTAR to COMPUTERLAND.
7. MISCELLANEOUS.
a. This Agreement shall be effective immediately upon execution by the
parties.
b. This Agreement is entered into, and shall be construed and
interpreted in accordance with the laws of the State of California.
4
<PAGE>
c. This Agreement may be signed in counterparts, each of which shall be
deemed to be an original.
AGREED TO AND EFFECTIVE AS OF MARCH 28, 1997.
MERISEL, INC. VANSTAR CORPORATION
By: /s/ DWIGHT STEFFENSON By: /s/ AHMAD MANSHOURI
--------------------------- -------------------------
Name: Dwight Steffenson Name: Ahmad Manshouri
Title: Chairman & CFO Title: Sr. Vice President and
General Manager, Operations
MERISEL FAB, INC. COMPUTERLAND CORPORATION
By: /s/ DWIGHT STEFFENSON By: /s/ C. KEVIN CHUANG
--------------------------- -------------------------
Name: Dwight Steffenson Name: C. Kevin Chuang
Title: Chairman Title: CFO
5
<PAGE>
EXHIBIT 10.31
LEGEND: [ * ] = INFORMATION OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED.
AMENDMENT NO. 15, dated as of March 28, 1997 to
the DISTRIBUTION AND SERVICES AGREEMENT originally
dated as of January 31, 1994, as amended through
the date hereof (the "Services Agreement") between
VANSTAR CORPORATION, a Delaware corporation,
("VANSTAR") and COMPUTERLAND CORPORATION, a
California corporation, ("COMPUTERLAND"), a
wholly-owned subsidiary of SYNNEX Information
Technologies, Inc. ("SYNNEX").
R E C I T A L S
a. VANSTAR and MERISEL FAB, INC. ("FAB") were parties to the Services
Agreement; it has been amended repeatedly by agreement of VANSTAR and FAB,
and the most recent amendment is Amendment No. 14, dated December 16, 1996.
b. COMPUTERLAND has agreed to purchase and assume substantially all of
the assets and certain of the liabilities of the business conducted by FAB,
subject to the terms and conditions of an Asset Purchase Agreement dated
January 15, 1997. COMPUTERLAND, VANSTAR and FAB have agreed to the assignment
of the Services Agreement under the terms of an "Assignment, Consent to
Assignment and Release Agreement" dated March 31, 1996. COMPUTERLAND's
agreement to such assignment, and VANSTAR's consent to such assignment are
conditioned, among other things, on the agreement of COMPUTERLAND and VANSTAR
to the terms set forth in this Amendment No. 15.
c. COMPUTERLAND and VANSTAR signed a "Term Sheet" in letter form and
dated March 14, 1997; this Amendment No. 15 constitutes the amendments to the
Services Agreement contemplated by the Term Sheet.
NOW, THEREFORE, for good and valuable consideration, the parties do
hereby agree as follows:
1. CAPITALIZED TERMS; EFFECTIVENESS OF AMENDMENTS. Capitalized terms
not otherwise defined herein shall have the meanings set forth in the
Services Agreement. Except as otherwise provided in this Amendment No. 15,
all amendments and prior
<PAGE>
letters of agreement executed between the parties shall continue in effect
through the end of the Winding Down Period or the earlier termination of the
Agreement except for the following amendments and letters of agreement which
were terminated in accordance with the terms of Amendment No. 13: Amendments
No. 1, 2 and 7; letter of agreement dated March 31, 1995 entitled "Drop Ship
Fee Reduction" and letter of agreement dated September 15, 1995 relating to
Apple Computer distribution fees and rebates.
2. AMENDMENT OF HEADING. The heading of the Services Agreement is
amended to read:
"DISTRIBUTION AND SERVICES AGREEMENT dated as of January 31,
1994, as amended through the date hereof (the "Agreement"),
between VANSTAR CORPORATION, a Delaware corporation formerly
known as ComputerLand Corporation (the "Seller"), and
COMPUTERLAND CORPORATION, a California corporation (the "Buyer")."
3. AMENDMENTS TO SECTION 1.1
(a) The definitions of the following defined terms are deleted:
Additional Extended Payment Amount
Baseline Adjustment Event
Basic Extended Payment Amount
Baseline Revenue
Buyer Prohibited Transferees
Calculation Period
Excess Percentage
Extended Payment Termination Date
Merisel
Minimum Growth Target
Other Merisel Distribution Business
Private Placement Closing Date
Rolling Average Net Payment Amount
(b) The definition of "Base Percentage" is amended to read:
"BASE PERCENTAGE" means [ * ].
(c) The definition of "Designated Territory is amended to read:
"DESIGNATED TERRITORY" means the 50 states of the United States
of America and the District of Columbia."
(d) The definition of "Monthly Distribution Fee" shall read:
2
<PAGE>
"MONTHLY DISTRIBUTION FEE means, for each month during
the Distribution Period and the Winding down Period, an
amount equal to [ * ] for such month TIMES [ * ]."
(e) The definition of "Scheduled Termination Date" (originally set
forth in Amendment No. 13) is amended to read:
"SCHEDULED TERMINATION DATE means September 30, 1997, provided,
however:
(i) in the event that Buyer gives Seller written notice not
later than July 1, 1997 of its election to terminate the
Distribution Period effective on July 31, 1997, then the Scheduled
Termination Date shall mean July 31, 1997; and
(ii) in the event that Buyer gives Seller written notice not
later than August 1, 1997 of its election to terminate the
Distribution Period effective on August 31, 1997, then the Scheduled
Termination Date shall mean August 31, 1997; and
(iii) in the event that Buyer gives Seller written notice of
its intention not later than September 1, 1997 of its election to
terminate the Distribution Period on December 31, 1997, then the
Scheduled Termination Date shall mean December 31, 1997.
In any case, and unless otherwise agreed by the parties, the
Scheduled Termination Date shall be followed by a [ * ] Winding
Down Period in accordance with Article VII.
(f) The definition of "Applicable Revenue" is amended to read:
"APPLICABLE REVENUE" for any period means the gross revenues of the
Subject Business recognized by Buyer for such period, determined in
accordance with GAAP, including Gross Sales, Royalties and any other
Revenue, in each case for such period, but excluding revenue
attributable to shipments of product by parties other than Seller.
4. AMENDMENT TO SECTION 2.1. Subsection 2.1(c) is amended by adding
the following:
"Sales of product by Seller to Buyer for resale to SYNNEX and
affiliates of SYNNEX shall be subject to credit limits and terms
and conditions established by Seller, which credit limits and terms
and conditions may be changed by Seller in its sole discretion. A
3
<PAGE>
material breach by Seller of its obligations in the preceding
sentence shall be considered a Material Default."
5. AMENDMENT TO SECTION 2.2. Section 2.2 is amended by adding new
subsection (i):
(i) Notwithstanding anything set forth in Section 2.2 to
the contrary, Seller agrees to grant Buyer, during the Distribution
Period, reasonable access to its mainframe for order entry and
other legitimate purposes limited, however, to access at Seller's
Pleasanton, California facilities. Seller further agrees to
cooperate with Buyer in Buyer's efforts to develop either an order
entry/product availability look-up function through mainframe
access or an EDI-based order entry system from SYNNEX's Fremont,
California and Greenville, South Carolina facilities."
6. AMENDMENT TO SECTION 2.3. The second sentence of Section 2.3(g) is
amended to read:
"In that connection, each party shall use commercially reasonable
efforts (i) to inform the other party regarding any significant
meetings, telephone conversations, correspondence and other
contracts with vendors if an ordinarily prudent person would
reasonably determine that such contact significantly concerns the
interests of the other party, and in the case of any such meetings
for which such party has reasonable advance notice and which are
expected to cover issues that an ordinarily prudent person would
consider important to the other party under the circumstances, to
permit a representative of the other party to participate therein."
7. AMENDMENT TO SECTION 2.3(k). Section 2.3(k) is deleted in its
entirety.
8. AMENDMENT TO SECTION 2.7. Section 2.7 is amended by adding new
Subsection (e), to read:
"(e) Notwithstanding anything set forth in this Section 2.7 or an
amendment to the contrary, Seller has advised Buyer of recent
increases and further anticipated increases to freight costs, and
of Seller's intention to procure the services of alternative
shipping providers in the near future. Buyer has agreed to pay
such increased costs in accordance with the procedures required
under the terms of the Services Agreement. In addition, within 30
days of the termination of the Winding Down Period, Buyer agrees to
pay Seller, if a positive figure, and Seller agrees to pay Buyer,
if a negative figure, a sum (the "Excess Freight Settlement") equal
to one half of the difference between [ * ] and the amount by which
the
4
<PAGE>
freight costs paid during the period from March 31, 1997 to the
end of the Winding Down Period exceeds [ * ] of the freight costs
that would have been incurred by Buyer if the freight rates during
such period had been equal to the freight rates applicable on
January 1, 1997."
9. AMENDMENT TO SECTION 2.8. Subsection (iv) of Section 2.8(b) is deleted
in its entirety, and Subsection (v) is renumbered as Subsection (iv) and is
amended to read in its entirety:
"(iv) the amount of any wire transfer made by Buyer to Seller
on such Business Day pursuant to Section 2.5(a) (to the extent
that Buyer shall have given notice of such wire transfer
pursuant to such Section 2.5(a))."
The first full paragraph following previous subsection (v) (and set forth in
Amendment No. 13) is amended to read:
"Subject to the further provisions of this Section 2.8(a), (i) if
the Daily Net Payment Amount is positive, then Buyer shall pay
that amount to Seller by the following Business Day pursuant
to Section 2.5(a), and (ii) if the Daily Net Payment Amount is
negative, then Seller shall pay that amount to Buyer by the
following Business Day by wire transfer of immediately
available funds, in accordance with Section 2.12(c). Seller
shall provide Buyer, on a monthly basis, with a printed
summary of all transactions completed hereunder, in a form
reasonably acceptable to Buyer. Buyer shall reimburse Seller
on a monthly basis for the postage costs of mailing printed
invoices."
10. AMENDMENT TO SECTION 2.9. Section 2.9 is amended to read:
"2.9 FEES. Buyer shall pay to Seller the following fees:
(a) An amount equal to the Monthly distribution
Fee for each month during the Distribution Period
and the Winding Down Period, payable as provided
in Section 2.10; and
(b) A "Fixed Services Fee" of [ * ] per month,
for the period April 1, 1997 through November 30,
1997, payable on the first day of each month
commencing April 1, 1997; and
(c) An "Additional Services Fee," which is in
5
<PAGE>
addition to the Monthly distribution Fee and the
Fixed Services Fee, in an amount to be determined
by the date of the termination of the Winding Down
Period, and as is set forth below:
If the termination of the Then the following Additional Service
Winding Down Fee shall be paid to Seller on the date(s)
Period is on indicated:
<TABLE>
<CAPTION>
10/31/97 11/31/97 12/31/97 1/31/98 2/28/98 3/31/98
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
10/31/97 [ * ]
11/30/97 [ * ]
12/31/97 [ * ]
3/31/98 [ * ] [ * ] [ * ] [ * ]
</TABLE>
11. AMENDMENT TO SECTION 2.10. Subsection (e)(i)(E) is amended to read:
"(E) interest payable pursuant to Section 2.5(b), as
certified pursuant to Section 2.10(b)(ii)(20);"
Subsection (e)(ii)(F) is amended to read:
(F) interest payable pursuant to Section 2.5(b), as
certified pursuant to Section 2.10(b)(ii)(20);"
Subsection (g) is amended by rewriting the first sentence to read:
"(g) Within 45 days after the end of each month, Buyer shall
certify to Seller in writing the Applicable Revenue of the Subject
Business for such month, as determined by Buyer in accordance with
generally accepted accounting principles, applied in a manner
consistent with the accounting principles used by Buyer for
financial reporting purposes."
12. AMENDMENT TO SECTION 2.16. Subsection (a) is amended to read:
"Seller (on its own behalf) may sell any product to any person at
any location, whether or not such location is served by Buyer or
any Customer, or engage in such other business or businesses as
Seller may from time to time determine."
13. AMENDMENT TO SECTION 2.17. Section 2.17 is amended to read:
"Subject to the terms and conditions of this Section 2.17, during
the Distribution Period, Buyer may (i) [ * ] from
6
<PAGE>
Seller, for the Subject Business, one or more specified products, or
all products of one or more specified vendors, [ * ]
[ * ] Seller hereunder or (ii) without prejudice to any
obligation Buyer may have under any [ * ] or
[ * ] or this Agreement, [ * ]provided, however, that in (i) above
Buyer shall give written notice of such election at least 60 and
not more than 120 days prior to the effectiveness thereof; further,
PROVIDED, HOWEVER, that such notice requirement shall not apply to
any [ * ] of a [ * ] by Seller if Buyer purchases such vendor's
products pursuant to Section 2.23."
14. AMENDMENT TO SECTION 2.19. Subsections (b) and (c) are deleted, and
subsection (a) is amended to read:
"2.19. PROMPT PAYMENT DISCOUNTS. (a) If any vendor shall offer
to Seller a Prompt Payment Discount in respect of any amounts payable
for products of the types held for sale to Buyer hereunder purchased
by Seller from such vendor during the Distribution Period, and the
interest rate equivalent of such Prompt Payment Discount, determined
as provided in Section 2.19(d), is a rate per annum not less than the
Prime Rate plus [ * ] per annum, then [ * ] shall have the option,
but not the obligation, to use commercially reasonable efforts to
[ * ] such [ * ] with respect to its [ * ] from [ * ] by [ * ]
within the [ * ], except as otherwise provided in this Section 2.19.
To the extent that [ * ] does not elect to [ * ] any such [ * ] that
has an interest rate equivalent of at least prime plus [ * ], [ * ]
shall offer to [ * ] the right to require [ * ] to [ * ] all or a
portion of any such [ * ] that [ * ] otherwise would elect not to
[ * ] by [ * ] on terms mutually acceptable to the parties. Any
party that [ * ] any portion of a [ * ] shall be entitled to [ * ]
an amount equal to interest on such portion at an annual rate of
prime plus [ * ] out of the [ * ]. Any remaining [ * ] shall be
apportioned between Seller and Buyer in accordance with the
respective amounts [ * ] by Seller and Buyer; provided, that if
any such apportionment would cause any party to receive an amount
(including any amount received pursuant to the immediately
preceding sentence) that would exceed such party's pro rata share
of the maximum [ * ], then the excess will be given to the
other party. For the purposes of determining the pro rata share of
any party referred to in the foregoing proviso, the allocation
percentage applicable to such party pursuant to Section 2.22 of the
Agreement for the relevant products shall be used.
15. AMENDMENT TO SECTION 2.22. Subsection (h) is added to read:
(h) Notwithstanding anything set forth in this Section 2.22 to the
7
<PAGE>
contrary, the parties agree that in those instances in which an
original equipment manufacturer has determined to exclude `strategic
allocations' in allocating product among its aggregators,
distributors and customers, and has informed the Seller in writing
of such allocation, the methodology for allocation of product
between Buyer and Seller shall also exclude such `strategic
allocations' beginning in the month following such notification."
16. AMENDMENT TO SECTION 2.33. Subsection (b) is deleted in its
entirety.
17. AMENDMENT TO SECTION 2.34. Section 2.34 is deleted in its entirety.
18. AMENDMENT TO SECTION 2.36. Section 2.36 is deleted in its entirety.
19. AMENDMENT TO ARTICLE II. Article II is amended by adding new Section
2.37 to read:
"2.37. SECURITY INTEREST. Buyer agrees to grant Seller, as
security for Buyer's performance of its obligations, a first priority
security interest in all of Buyer's inventory and receivables on the
terms set forth in Exhibit A attached hereto."
20. AMENDMENTS TO SECTIONS 4.2, 4.3, 4.4, AND 4.5. Sections 4.2, 4.3,
4.4, and 4.5 are deleted in their entirety.
21. AMENDMENT TO SECTION 4.6. Subsection (e) is added to read:
"(e) Notwithstanding anything set forth in Section 4.6 or Amendment
No. 10 to the contrary, the parties agree: (i) that Seller shall not
be obligated to continue the MASTER program after June 30, 1997; and
(ii) that in no event shall the value of accounts receivable financing
under the MASTER program exceed five million dollars ($5,000,000)."
22. AMENDMENTS TO SECTION 5.7. Section 5.7 is deleted in its entirety.
23. AMENDMENT TO ARTICLE VII. The first two paragraphs of Section 7.1(a)
of the Agreement (as amended by Amendment No. 13) are amended to read in their
entirety:
"(a) The Seller and the Buyer shall continue to negotiate in
good faith to establish a timetable and procedures for the
termination of the Logistics Services provided pursuant to Article
II. Such negotiations shall include (i) discussions regarding the
Seller's proposed maintenance of inventories solely at the
Indianapolis DDC from which all shipments to Customers on buyer's
behalf hereunder would be made during the Winding Down Period (as
defined below); and (ii) discussions regarding
8
<PAGE>
Buyer's purchase of inventory from Seller during the Winding Down
Period.
If the Seller and the Buyer shall be unable to agree upon such a
timetable and procedures prior to July 1, 1997, the Distribution
Period shall automatically deemed to be the [ * ] following the
Scheduled Termination Date (such [ * ] period being referred to as
the "Winding Down Period"). As shall be reasonably requested by
Buyer, Seller shall provide Buyer with information necessary for
Buyer and Seller to manage inventory prior to and during the
Winding Down Period including but not limited to information
pertaining to SKU's, on-hand inventory, orders, product
availability and Buyer's daily run rate.
24. AMENDMENT TO SECTION 9.3.
if to the Buyer, to:
Attn. Donna E. Straff
General Counsel
COMPUTERLAND CORPORATION
5964 W. Las Positas Blvd.
Pleasanton, CA 94588
Fax: 510/467-6080
with a copy to:
Attn: Robert Huang
President
SYNNEX Information Technologies, Inc.
3797 Spinnaker Court
Fremont, CA 94538
if to the Seller, to:
Attn: H. Christopher Covington
Senior Vice President and General Counsel
Vanstar Corporation
5964 W. Las Positas Blvd.
Pleasanton, CA 94588-9012
Fax: 510/734-4823
with a copy to:
9
<PAGE>
Attn: Frederick M. Bachman, Esq.
O'Sullivan Graev & Karabell
30 Rockefeller Plaza
New York, NY 10112
Fax: 212/408-2420
25. AMENDMENT TO ARTICLE 9. Article 9 is amended by adding a new Section
9.13 to read:
"9.13 PURCHASE OF BUYER FRANCHISEES. Seller agrees that it
shall not, prior to the end of the Winding Down Period purchase, or
agree to purchase, any franchisee of Buyer."
26. AMENDMENT TO SCHEDULES. Each of the following schedules to the
Agreement is hereby terminated in its entirety and replaced with
"[Intentionally omitted]."
SCHEDULE 1.1-2A
27. ASSIGNMENT TO SUBLEASE. FAB has agreed to assign its interest in
the "Sublease" for its office premises on West Las Positas Blvd. In
Pleasanton to Buyer. Vanstar agrees to use all reasonable efforts to obtain
from the landlord the landlord's consent to such assignment.
28. CONTINUED EFFECT OF AGREEMENT. Except as amended hereby, the
Agreement shall remain in full force and effect in accordance with its terms
and conditions. The extension to the Distribution and Services Period
provided by this Amendment No. 15 shall not obligate any party to the
Agreement to agree to any further extension to such Period.
29. MISCELLANEOUS. This Amendment No. 15 (a) shall be governed by the
laws of the State of California, (b) shall be binding upon and inure to the
benefit of the Seller and the Buyer and their respective successors and
permitted assigns, (c) shall not be amended or modified except by written
instrument signed by the Seller and the Buyer and (d) represents the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior written and oral agreements and understandings with
respect thereto, including those portions of the Term Sheet contemplating the
amendments provided hereby.
30. COUNTERPARTS. This Amendment No. 15 may be executed in counterpart
by the parties hereto.
IN WITNESS WHEREOF, the parties have set their hands as of the date first
written above.
VANSTAR CORPORATION
10
<PAGE>
By: /s/ AHMAD MANSHOURI
-----------------------
Name: Ahmad Manshouri
Title: Sr. Vice President and
General Manager, Operations
COMPUTERLAND CORPORATION
By: /s/ C. KEVIN CHUANG
------------------------
Name: C. Kevin Chuang
Title: CFO
11
<PAGE>
Exhibit 11.1
VANSTAR CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Weighted average number of
common shares outstanding 41,693 12,107 11,040
Common equivalent shares from stock options
using the treasury stock method 1,589 309 72
Common shares from the assumed conversion
of all outstanding preferred stock and warrants - 20,306 18,703
Common equivalent shares from stock options
and warrants related to SAB No. 83 using
the treasury stock method - 1,528 2,671
------- ------- ------
Shares used in computing
earnings per share 43,282 34,250 32,486
------- ------- ------
------- ------- ------
Net income $29,994 $17,247 $1,268
------- ------- ------
------- ------- ------
Primary and fully diluted earnings per share
(Pro forma prior to March 11, 1996) $0.69 $0.50 $0.04
------- ------- ------
------- ------- ------
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF VANSTAR CORPORATION
<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%
Georgia Computer Professionals, Inc. (1)
Georgia ComputerXperts, Inc. (1)
North Carolina Contract Data, Inc. (2)
Texas CLand Tex, Inc. 100%
Delaware Vanstar Finance Co. 100%
Delaware Vanstar Financing Trust (3)
Delaware Vanstar International Corporation 100%
Delaware VST West, Inc. 100%
Delaware VST Midwest, Inc. 100%
North Carolina VSTNC, Inc. 100%
Illinois VST Illinois, Inc. 100%
<CAPTION>
VANSTAR FOREIGN
PLACE OF DOMICILE FOREIGN SUBSIDIARIES OWNERSHIP OWNERSHIP
- ----------------- --------------------- --------- ---------
<S> <C> <C> <C>
Belgium Vanstar Belgium N.V. (4)
British Columbia, Canada Vanstar International Services (Canada), Inc. (5)
Chile ComputerLand de Chile, SA 100%
Hong Kong ComputerLand Corporation of America (China) 50% 50% (6)
Limited (BEING DISSOLVED)
Hong Kong ComputerLand Corporation of America 50% 50% (6)
(China) Asia Pacific Limited (BEING DISSOLVED)
Hong Kong ComputerPort World Trade Limited 100%
(BEING DISSOLVED)
Hong Kong Vanstar Asia Pacific Limited 99.9% (7)
Luxembourg Vanstar Europe S.A. 99.9% (7)
Mexico ComputerLand de Mexico, S.A. de C.V. 49% 51% (8)
Singapore ComputerLand Far East Pte. Limited 100%
(BEING DISSOLVED)
Thailand ComputerLand Corporation (Thailand) Co., Ltd. 100%
United Kingdom Vanstar UK Limited (9)
</TABLE>
____________________
(1) 100% owned by Contract Data, Inc.
(2) 100% owned by VSTNC, Inc.
(3) Vanstar Financing Trust, a statutory business trust formed under the laws
of Delaware, is a wholly-owned subsidiary of Vanstar Corporation for
accounting purposes.
(4) 99.96% owned by Vanstar Europe S.A.; .04% owned by William Y. Tauscher.
(5) 100% owned by Vanstar International Corporation.
(6) Fanlaw ltd, a Hong Kong company holding shares for Vanstar Corporation.
(7) .1% owned by William Y. Tauscher.
(8) Mexicanos de Datos, a Mexican company.
(9) 100% owned by Vanstar Europe S.A.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (No. 333-11357) pertaining to the Company's Employee Stock
Purchase Plan; Form S-8 (No. 333-11553) pertaining to the 1988 Stock Option
Plan; Form S-8 (No. 333-11555) pertaining to the Company's 1993 Stock
Option/Stock Issuance Plan; Form S-8 (No. 333-11557) pertaining to the
Company's Stock Option Agreement with an Employee; Form S-8 (No. 333-11559)
pertaining to the Company's Stock Option Agreement with an Employee; and Form
S-8 (No. 333-13301) pertaining to the Company's 1996 Stock Option/Stock
Issuance Plan of our report dated June 10, 1997, with respect to the
consolidated financial statements and schedule of Vanstar Corporation
included in the Annual Report (Form 10-K) for the year ended April 30, 1997.
Ernst & Young LLP
Atlanta, Georgia
July 22, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE TWELVE MONTHS ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 5,686
<SECURITIES> 0
<RECEIVABLES> 188,835
<ALLOWANCES> 8,610
<INVENTORY> 389,592
<CURRENT-ASSETS> 598,976
<PP&E> 102,991
<DEPRECIATION> 63,751
<TOTAL-ASSETS> 758,643
<CURRENT-LIABILITIES> 390,547
<BONDS> 5,946
194,518
0
<COMMON> 43
<OTHER-SE> 166,928
<TOTAL-LIABILITY-AND-EQUITY> 758,643
<SALES> 1,849,365
<TOTAL-REVENUES> 2,178,566
<CGS> 1,665,212
<TOTAL-COSTS> 1,864,602
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (7,780)
<INTEREST-EXPENSE> 17,061
<INCOME-PRETAX> 54,903
<INCOME-TAX> 19,765
<INCOME-CONTINUING> 35,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,994
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.69
</TABLE>
