<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 1-14192
- --------------------------------------------------------------------------------
VANSTAR CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
DELAWARE 94-2376431
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
1100 Abernathy Road, Building 500, Suite 1200
Atlanta, Georgia 30328
(Address of Principal Executive Offices)
(770) 522-4700
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of outstanding shares of the Registrant's Common Stock, par value
$.001 per share, was 43,195,187 on September 9, 1997.
Page 1 of 18
<PAGE>
VANSTAR CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of July 31, 1997 and
April 30, 1997 3
Consolidated Statements of Income for the Three
Months Ended July 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity 5
Consolidated Statements of Cash Flows for the Three
Months Ended July 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE>
1. FINANCIAL STATEMENTS
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1997 1997
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................................... $ 10,493 $ 5,686
Receivables, net of allowance for doubtful accounts of
$8,375 at July 31, 1997 and $8,610 at April 30, 1997.................... 271,292 180,225
Inventories............................................................... 470,394 389,592
Deferred income taxes..................................................... 12,906 14,855
Prepaid expenses and other current assets................................. 12,900 8,618
----------- ----------
Total current assets................................................... 777,985 598,976
Property and equipment, net................................................ 42,732 39,240
Other assets, net.......................................................... 67,684 63,775
Goodwill, net of accumulated amortization of $6,391 at July 31,
1997 and $5,640 at April 30, 1997........................................ 106,564 56,652
----------- ----------
$ 994,965 $ 758,643
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 354,026 $ 255,147
Accrued liabilities....................................................... 42,532 34,392
Deferred revenue.......................................................... 22,695 21,821
Short-term borrowings..................................................... 196,771 74,402
Current maturities of long-term debt...................................... 4,519 4,785
----------- ----------
Total current liabilities.............................................. 620,543 390,547
Long-term debt, less current maturities.................................... 4,960 5,946
Other long-term liabilities................................................ 1,421 661
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company.................. 194,603 194,518
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares
authorized, 42,989,652 shares issued and outstanding at July 31,
1997; 42,896,779 shares issued and outstanding at April 30, 1997........ 43 43
Additional paid-in capital............................................... 126,670 125,926
Retained earnings........................................................ 46,725 41,002
----------- ----------
Total stockholders' equity............................................. 173,438 166,971
----------- ----------
$ 994,965 $ 758,643
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Product.................................................................. $ 581,249 $ 490,065
Services................................................................. 99,385 69,025
---------- ----------
Total revenue.......................................................... 680,634 559,090
---------- ----------
Cost of revenue:
Product.................................................................. 524,645 441,593
Services................................................................. 63,411 39,375
---------- ----------
Total cost of revenue.................................................. 588,056 480,968
---------- ----------
Gross margin............................................................... 92,578 78,122
Selling, general and administrative expenses............................... 73,458 56,896
---------- ----------
Operating income........................................................... 19,120 21,226
Interest income.......................................................... 404 882
Financing expense, net................................................... (5,792) (6,611)
---------- ----------
Income from continuing operations before income taxes
and distributions on preferred securities of Trust....................... 13,732 15,497
Income tax provision....................................................... (4,944) (5,734)
---------- ----------
Income from continuing operations before
distributions on preferred securities of Trust........................... 8,788 9,763
Distributions on convertible preferred securities of
Trust (less income taxes of $1,253)...................................... (2,228) --
---------- ----------
Net income................................................................. $ 6,560 $ 9,763
---------- ----------
---------- ----------
Primary and fully diluted earnings per share............................... $ 0.15 $ 0.23
---------- ----------
---------- ----------
Shares used in per share calculation....................................... 44,033 43,141
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at April 30, 1997................................ 42,897 $ 43 $ 125,926 $ 41,002 $ 166,971
Net income............................................... 6,560 6,560
Issuance of Common Stock for the exercise of stock
options, including tax benefit......................... 93 744 744
Unrealized holding loss on available-for-sale
securities............................................. (837) (837)
--------- --------- ---------- --------- ------------
Balance at July 31, 1997................................. 42,990 $ 43 $ 126,670 $ 46,725 $ 173,438
--------- --------- ---------- --------- ------------
--------- --------- ---------- --------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income......................................... $ 6,560 $ 9,763
Adjustments:
Depreciation and amortization..................... 5,049 3,870
Deferred income taxes............................. 3,688 5,734
Change in provision for doubtful accounts......... (255) (1,779)
Changes in operating assets and liabilities:
Receivables...................................... (74,523) 30,867
Inventories...................................... (68,094) 20,379
Prepaid expenses and other assets................ (5,573) 294
Accounts payable................................. 61,498 31,726
Accrued and other liabilities.................... (1,738) (6,448)
--------- ---------
Total adjustments.............................. (79,948) 84,643
--------- ---------
Net cash provided by (used in) operating
activities.......................................... (73,388) 94,406
Cash Flows from Investing Activities:
Capital expenditures............................... (6,693) (3,148)
Proceeds from sales of building.................... -- 3,125
Purchase of business, net of cash acquired......... (32,486) (34,532)
--------- ---------
Net cash used in investing activities................ (39,179) (34,555)
Cash Flows from Financing Activities:
Payments on long-term debt......................... (5,739) (1,903)
Borrowings (repayments) under line of credit, net.. 122,369 (58,772)
Issuance ofcommon stock............................ 744 --
--------- ---------
Net cash provided by (used in) financing activities.. 117,374 (60,675)
--------- ---------
Net Increase (Decrease) in Cash...................... 4,807 (824)
Cash at beginning of the period.................... 5,686 14,498
--------- ---------
Cash at End of the Period............................ $ 10,493 $ 13,674
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest......................................... $ 2,177 $ 6,678
--------- ---------
--------- ---------
Discounts and net expenses on receivable
Securitization.................................. $ 2,760 $ --
--------- ---------
--------- ---------
Distributions on preferred securities of Trust... $ 3,396 --
--------- ---------
--------- ---------
Income taxes, net of refunds..................... $ 628 (77)
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(Continued)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Supplemental disclosure of noncash investing
and financing activities:
Dataflex Regions purchase:
Fair value of assets purchased................... $ 46,371
Cash paid, net of cash received.................. (34,532)
---------
Liabilities assumed.............................. $ 11,839
---------
---------
Sysorex purchase:
Fair value of assets purchased................... $ 85,451
Cash paid, net of cash received.................. (32,486)
---------
Liabilities assumed.............................. $ 52,965
---------
---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM REPORTING
The financial statements for Vanstar Corporation (the "Company") for the
three months ended July 31, 1997 are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the financial statements reflect
all adjustments (of a normal and recurring nature) which are necessary for a
fair presentation of the financial position, results of operations and cash
flows for the interim periods. The results of operations for the three months
ended July 31, 1997 are not necessarily indicative of the results to be
expected for the entire fiscal year. These financial statements should be
read in conjunction with the financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended April 30, 1997.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted for
both interim and annual financial statements for periods ending after
December 15, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the effect of stock options which are dilutive will be excluded. The
change would have no effect on the primary earnings per share for the first
quarter ended July 31, 1997 and would have increased primary earnings per
share for the quarter ended July 31, 1996 by $0.01. The Company has not yet
determined what the impact of Statement 128 will be on the calculation of
fully diluted earnings per share.
2. EARNINGS PER SHARE
Primary and fully diluted earnings per share are computed using the
weighted average number of shares of Common Stock and dilutive Common Stock
equivalents outstanding during the period. Common Stock equivalents are
computed for the Company's outstanding options using the treasury stock
method. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletins, Common Stock equivalents also include amounts computed on options
and warrants issued during the twelve months immediately preceding the date
of the initial filing of the Company's Registration Statement on Form S-1
relating to the Company's initial public offering as if they were outstanding
for all periods prior to the closing on March 11, 1996 (using the treasury
stock method and the initial public offering price of $10.00 per share).
3. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT
SECURITIES OF THE COMPANY
During October 1996, Vanstar Financing Trust, a Delaware statutory
business trust (the "Trust") with respect to which the Company owns all of
the common trust securities, sold 4,025,000 Trust Convertible Preferred
Securities ("Convertible Preferred Securities"). The Convertible Preferred
Securities have a liquidation value of $50 per security and are convertible
at any time at the option of the holder into shares of the Company's Common
Stock at a conversion rate of 1.739 shares for each Convertible Preferred
Security (equivalent to a conversion price of $28.75 per share of the
Company's Common Stock), 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
8
<PAGE>
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 July 1, April 1, July 1 and October 1. The Debentures are redeemable by
the Company, in whole or in part, on or after October 5, 1999 at designated
redemption prices. If the Company redeems the Debentures, the Trust must
redeem Convertible Preferred Securities on a pro rata basis having an
aggregate liquidation value equal to the aggregate principal amount of the
Debentures redeemed. The sole asset of the Trust is $207.5 million aggregate
principal amount of the Debentures. The Debentures and related income
statement effects are eliminated in the Company's consolidated financial
statements.
4. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established a revolving funding
trade receivables securitization facility (the "Securitization Facility")
which provides the Company with up to $175 million in available credit. In
August 1997, the available credit under the Securitization Facility was
increased to $200 million. In connection with the Securitization Facility,
the Company sells on a revolving basis, certain of its trade receivables
("Pooled Receivables") to the special purpose corporation which in turn sells
a percentage ownership interest in the Pooled Receivables to a commercial
paper conduit sponsored by a financial institution. These transactions have
been recorded as a sale in accordance with FASB Statement No. 125, ACCOUNTING
FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES. The amount of the Pooled Receivables, which totaled $290.9
million at July 31, 1997, is reflected as a reduction to receivables. The
Company retains an interest in certain of the assets sold. At July 31, 1997,
the amount of that retained interest totaled $130.5 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 $175 million as of July 31, 1997. Such proceeds are
included in cash flows from operating activities in the
consolidated statements of cash flows. Discounts and net expenses associated
with the sales of the receivables totaling $2.8 million are included in
financing expenses, net on the consolidated statements of income for the three
months ended July 31, 1997.
5. FINANCING EXPENSES, NET
Financing expenses, net includes interest incurred on borrowings under
the Company's financing agreement with IBM Credit Corporation ("IBMCC") and
discounts and net expenses associated with the Company's Securitization
Facility.
6. ACQUISITIONS
On May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Dataflex Corporation and of Dataflex's wholly-owned subsidiary, Dataflex
Southwest Corporation. The assets acquired and liabilities assumed comprise
substantially all of the assets and business operations previously associated
with the business operations of Dataflex known as the Dataflex Western Region
and Dataflex Southwest Region (the "Dataflex Regions"). The Dataflex Regions
offered PC product distribution, service and support in the states of
Arizona, California, Colorado, Nevada, New Mexico, and Utah and reported
revenues of approximately $145 million for the fiscal year ended March 31,
1996. The purchase price of the Dataflex Regions, net of cash received, was
$37.7 million.
9
<PAGE>
On September 4, 1996, the Company acquired Mentor Technologies, Ltd., an
Ohio limited partnership ("Mentor Technologies") providing training and
education services in Ohio and throughout the upper mid-western United
States. A total of 300,000 shares of the Company's Common Stock (having an
aggregate value on the closing date of approximately $6.0 million) were
issued in connection with this acquisition. 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 purchased certain specified assets for $4.0 million. In
addition, DCT could receive a maximum of 180,000 shares of the Company's
Common Stock upon the satisfaction of certain conditions. The Company also
entered into a servicing and marketing agreement on January 9, 1997 whereby
the Company will provide certain computer products and billing services to
DCT. Based upon certain criteria under the servicing and marketing agreement,
DCT also may receive, at DCT's election, cash or up to 40,000 additional
restricted shares of the Company's Common Stock.
On July 7, 1997, the Company acquired certain of the assets and assumed
certain of the liabilities of Sysorex Information Systems, Inc. ("Sysorex"),
a government technology provider. The purchase price was approximately $46.0
million, subject to post closing adjustments, and a contingent payment of
500,000 shares of the Company's common stock based on the future financial
performance of the acquired business.
The acquisitions of the Dataflex Regions, DCT and Sysorex were accounted
for as purchases and the excess cost over the fair value of net assets
acquired for each acquisition is being amortized on a straight line basis
over a 25 year period. The 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.
7. COMMITMENTS AND CONTINGENCIES
On July 3, 1997, a purported class action suit was filed against the
Company and various other parties by a Trust claiming to be a stockholder of
the Company. The Company believes that the plaintiff's allegations are
without merit and intends to defend the suit vigorously.
Various other legal actions arising in the normal course of business
have been brought against the Company and certain of its subsidiaries.
Management believes that the ultimate resolution of these actions will not
have a materially adverse effect on the Company's financial position or
results of operations, taken as a whole.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes of the Company
included elsewhere in this report. This Management's Discussion and Analysis
of Financial Condition and Results of Operations and other parts of this
Quarterly Report on Form 10-Q contain forward looking statements that involve
risks and uncertainties. Among the risks and uncertainties to which the
Company is subject are the risks inherent in the Company's substantial
indebtedness, the fact that the Company has experienced significant
fluctuations in revenues and operating results, the risks associated with
managing the Company's inventory and service offerings in light of product
life cycles and technological change, the risks associated with implementing
management responses to changing technology and market conditions, the
Company's relationship with its significant customers, intense price
competition in the Company's markets and the Company's dependence upon its
key vendors. As a result, the actual results realized by the Company could
differ materially from the results discussed in the forward-looking
statements made herein. Words or phrases such as "will," "anticipate,"
"expect," "believe," "intend," "estimate," "project," "plan" or similar
expressions are intended to identify forward-looking statements. Readers are
cautioned not to place undue reliance on the forward-looking statements made
in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
When compared to the results for the three months ended July 31, 1996,
the Company's results of operations for the three months ended July 31, 1997
were impacted by the following transactions. On May 24, 1996, the Company
acquired substantially all of the assets and liabilities of the Dataflex
Regions. The Dataflex Regions offered PC product distribution, service and
support in the states of Arizona, California, Colorado, Nevada, New Mexico,
and Utah. On September 4, 1996, the Company acquired Mentor Technologies, an
Ohio limited partnership providing training and educational services in Ohio
and throughout the upper mid-western United States. During October 1996, the
Company, through the Trust, issued 4,025,000 Convertible Preferred
Securities. Those securities are convertible into the Company's $.001 par
value common stock (the "Common Stock") and pay cumulative cash distributions
at an annual rate of 6-3/4% of the liquidation amount of $50 per security. On
December 16, 1996, the Company acquired Contract Data Services, Inc., a North
Carolina corporation providing outsourcing of integrated information
technology services, related technical support services and procurement of
computer hardware and software ("CDS"). On July 7, 1997, the Company acquired
certain of the assets and assumed certain of the liabilities of Sysorex, a
government technology provider for a purchase price of approximately $46.0
million, subject to post closing adjustments, and a contingent payment of
500,000 shares of Common Stock based on the future financial performance of
the acquired business. Effective December 20, 1996, the Company established
the Securitization Facility which provided the Company with up to $175
million in available credit. In connection with the Securitization Facility
the Company sells, on a revolving basis through a wholly-owned
non-consolidated subsidiary, an undivided interest in the Pooled Receivables.
In August 1997, the available credit under the Securitization Facility was
increased to $200 million.
Vanstar's four primary sources of revenue are; product, life cycle
services, professional services and other services. The Company refers to the
integration of the offerings of design and consulting, acquisition and
deployment, operation and support, and enhancement and migration as "Life
Cycle Management." For larger clients, the Company can manage every phase of
the Life Cycle of it customers' PC networks. Product revenue is primarily
derived from the sale of computer hardware, software, peripherals, and
communication devices manufactured by third parties and sold by the Company,
principally to implement integration projects. Life Cycle services revenue is
derived primarily from services performed for the desktop and focused on the
client or user of the PC network. These support services include desktop
installation, repair and maintenance, moves, adds and changes, extended
warranty, asset management and help desk. Professional services revenue is
derived primarily from high value-added services, including services focused
on the server and communication segments of the PC network infrastructure.
Professional services revenue includes network installation, design and
consulting, and enhancement and migration, as well as server deployment and
support. Other services revenue is derived primarily from training and
education services and from fees earned on the distribution services
agreement with ComputerLand Corporation (formerly with Merisel FAB, Inc.).
Pursuant to that distribution services agreement, the Company provides
product distribution to franchises and affiliates of ComputerLand Corporation
("ComputerLand"), a subsidiary of Synnex Information Technologies, Inc.
("Synnex").
11
<PAGE>
The following table sets forth for the unaudited periods indicated, the
Company's (i) total revenue, gross margin and gross margin percentage by
revenue source, (ii) selling, general and administrative expenses in total
and as a percentage of total revenue and (iii) operating income in total
and as a percentage of total revenue (Dollars in thousands).
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
----------------------
<S> <C> <C>
REVENUE: 1997 1996
---------- ----------
Product.............................. $ 581,249 $ 490,065
Services:
Life Cycle.......................... 56,194 38,939
Professional........................ 35,053 21,698
Other............................... 8,138 8,388
---------- ----------
Total revenue.................... $ 680,634 $ 559,090
---------- ----------
---------- ----------
GROSS MARGIN:
Product.............................. $ 56,604 $ 48,472
Services:
Life Cycle.......................... 15,867 14,485
Professional........................ 14,692 8,417
Other............................... 5,415 6,748
---------- ----------
Total gross margin............... $ 92,578 $ 78,122
---------- ----------
---------- ----------
GROSS MARGIN PERCENTAGE:
Product.............................. 9.7% 9.9%
Services:
Life Cycle......................... 28.2% 37.2%
Professional....................... 41.9% 38.8%
Other.............................. 66.5% 80.4%
---------- ----------
Total gross margin percentage.... 13.6% 14.0%
---------- ----------
---------- ----------
Selling, general and
Administrative expenses............ $ 73,458 $ 56,896
% of total revenue................ 10.8% 10.2%
Operating income..................... $ 19,120 $ 21,226
% of total revenue................ 2.8% 3.8%
</TABLE>
THREE MONTHS ENDED JULY 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
JULY 31, 1996
PRODUCT. Revenue increased 18.6% to $581.2 million for the three months
ended July 31, 1997 from $490.1 million for the three months ended July 31,
1996. The Company believes that this increase is a result of the Company's
successful sales and marketing efforts and increased sales resulting from
acquisitions. Gross margin increased 16.8% to $56.6 million for the three
months ended July 31, 1997 from $48.5 million for the three months ended July
31, 1996. Gross margin percentage decreased to 9.7% for the three months
ended July 31, 1997 from 9.9% for the three months ended July 31, 1996.
Vanstar operates in a very aggressive price environment that will continue to
put pressure on gross margin received from product sales.
LIFE CYCLE SERVICES. Revenue increased 44.3% to $56.2 million for the
three months ended July 31, 1997 from $38.9 million for the three months
ended July 31, 1996. This increase was the result of increased demand for the
Company's overall Life Cycle service offerings and increased sales as a
result of the acquisition of CDS. Gross margin increased 9.5% to $15.9
million for the three months ended July 31, 1997 from $14.5 million for the
three months ended July 31, 1996. Gross margin percentage decreased to 28.2%
for the three months ended July 31, 1997 compared with 37.2% for the three
months ended July 31, 1996. As the Company continues to improve the processes
of its enhanced service delivery model, additional resources are being
focused on training and a high level of customer service. The Company hopes
to realize productivity benefits from these efforts in the second half of the
fiscal year.
12
<PAGE>
PROFESSIONAL SERVICES. Revenue increased 61.5% to $35.1 million for the
three months ended July 31, 1997 from $21.7 million for the three months
ended July 31, 1996. This increase was a result of increased demand for the
Company's higher-end consulting, design and project management services, as
well as higher rates charged for those services. The Company believes that
increased customer demand resulted from the continuing transition by the
Company's customers to new higher performance technologies and increased
utilization of client/server networks. Gross margin increased 74.6% to $14.7
million for the three months ended July 31, 1997 from $8.4 million for the
three months ended July 31, 1996. Gross margin percentage increased to 41.9%
for the three months ended July 31, 1997 from 38.8% for the three months
ended July 31, 1996. The increase in gross margin percentage resulted from
higher utilization rates, as well as higher rates charged for professional
services, which were partially offset by higher labor costs.
OTHER SERVICES. Revenue decreased 3.0% to $8.1 million for the three
months ended July 31, 1997 from $8.4 million for the three months ended July
31, 1996 primarily due to a decrease in the fees earned on the distribution
agreement with Synnex's subsidiary, ComputerLand. Gross margin decreased
19.8% to $5.4 million for the three months ended July 31, 1997 from $6.7
million for the three months ended July 31, 1996. Gross margin percentage
decreased to 66.5% for the three months ended July 31, 1997 from 80.4% for
the three months ended July 31, 1996. The decline in gross margin percentage
was primarily the result of the higher contribution of training and education
revenue to total other services revenue. Training and education revenue
accounted for 50.3% of the total other services revenue for the three months
ended July 31, 1997, up from 31.7% for the three months ended July 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 29.1% to $73.5 million for the three
months ended July 31, 1997 from $56.9 million for the three months ended July
31, 1996. Selling, general and administrative expenses as a percentage of
revenue increased to 10.8% for the three months ended July 31, 1997 from
10.2% for the three months ended July 31, 1996.
OPERATING INCOME. Operating income decreased 9.9% to $19.1 million for
the three months ended July 31, 1997 from $21.2 million for the three months
ended July 31, 1996. Operating income as a percentage of total revenue
decreased to 2.8% for the three months ended July 31, 1997 from 3.8% for the
three months ended July 31, 1996.
FINANCING EXPENSES, NET. Financing expenses, net for the three months
ended July 31, 1997 represents primarily interest incurred on borrowings
under the Company's financing agreement with IBM Credit Corporation ("IBMCC")
and net expenses associated with the Company's Securitization Facility.
Financing expenses, net for the three months ended July 31, 1996 represents
primarily interest incurred on borrowings under the Company's financing
agreement with IBMCC. Financing expenses decreased 12.4% to $5.8 million for
the three months ended July 31, 1997 from $6.6 million for the three months
ended July 31, 1996 due to lower average borrowings, lower interest rates and
cost reductions resulting from the sales of certain trade receivables. The
decline in 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 the establishment of the Securitization Facility in December
1996 (see notes 3 and 4 of Notes to Consolidated Financial Statements).
TAXES. The effective tax rates for the three months ended July 31, 1997
and 1996 of 36% and 37%, respectively, were different than the U.S. statutory
rate of 35% primarily due to state tax provisions. At July 31, 1997 and April
30, 1997, the Company has recorded net deferred tax assets of $12.9 million
and $14.9 million, respectively. The full realization of the deferred tax
assets carried at July 31, 1997 is dependent upon the Company achieving
sufficient future pretax earnings prior to the expiration of the net
operating loss carryforwards. The net operating loss carryforwards expire in
the years 2000 through 2010. Although realization is not assured, management
believes that sufficient taxable income will be generated from operations to
realize the net deferred tax assets.
13
<PAGE>
DISTRIBUTIONS ON CONVERTIBLE PREFERRED SECURITIES OF TRUST, NET OF TAX.
In October 1996, the Trust issued 4,025,000 Convertible Preferred Securities
as part of a refinancing plan directed at reducing the Company's overall
interest costs. Distributions on Convertible Preferred Securities accrue at
an annual rate of 6-3/4% of the liquidation value of $50 per security and are
included in "Distributions on convertible preferred securities of trust, net
of tax" in the Consolidated Statements of Income (see note 3 of Notes to
Consolidated Financial Statements)
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended July 31, 1997, the Company utilized cash
generated from operations, including sales of certain of its trade
receivables to fund its revenue growth, working capital requirements,
payments on its long-term debt and purchases of businesses and capital
equipment.
Effective December 20, 1996, the Company established the Securitization
Facility, providing the Company with up to $175 million in available credit.
Pursuant to the Securitization Facility, the Company, through a wholly-owned
subsidiary, sells an undivided percentage ownership interest in the Pool
Receivables. As of July 31, 1997, the proceeds of the sales totaled $175
million. In August 1997, the available credit under the Securitization
Facility was increased to $200 million.
The Company's operating activities used cash of $73.4 million for the
three months ended July 31, 1997 as a result of increases in accounts
receivable and inventory offset by increases in accounts payable. The
increase in accounts receivable was a result of increased sales. The increase
in inventory and accounts payable was a result of large buy-ins from computer
manufacturers.
During the three months ending July 31, 1997, the Company used cash of
$32.5 million (net of cash acquired) to purchase Sysorex and used $5.8
million to make payments on certain long term obligations. During this
period, the Company also used cash of $6.7 million for capital expenditures.
The Company plans to make additional investments in its automated systems and
its capital equipment throughout the remainder of fiscal year 1998.
The Company currently has a $350 million line of credit under its
Financing Program Agreement with IBMCC. At July 31, 1997 the Company had
$346.8 million outstanding under this facility of which $150.0 million is
included in accounts payable and $196.8 million is classified as short-term
borrowings. Borrowings under the line of credit are subject to certain
borrowing base limitations and are secured by portions of the Company's
inventory, accounts receivable, and certain other assets. As of July 31, 1997
amounts borrowed under the line of credit bear interest at prime minus 0.80%.
The line of credit expires October 31, 1998.
The Company believes that future cash generated from operations together
with its Financing Program Agreement and Securitization Facility will be
sufficient to meet its cash requirements through at least fiscal year 1998.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 3, 1997, a trust claiming to have purchased shares of 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 materially adverse effect on the Company's financial position or
results of operations, taken as a whole.
ITEM 2. CHANGES IN SECURITIES
On July 7, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Sysorex. 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 the Common Stock
if the acquired business meets certain financial performance criteria.
The transaction resulting in the issuance of the contingent payment
obligation and the right to receive shares of the Common Stock in respect
thereof was effected in a private transaction in reliance upon the exemptions
from the registration requirements of the Securities Act of 1933, as amended
(the "Act"), contained in Section 4(2) of the Act and/or Regulation D
promulgated under the Act. The contingent payment obligation was issued to a
single purchaser (Sysorex), which was provided with access to all relevant
information regarding the Company and which represented to the Company that
it was an "accredited investor," as defined under the Act, and that the
contingent payment obligation and any Common Stock to be issued pursuant
thereto were being acquired for investment purposes and not with a view
toward resale or distribution.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
11.1* Computation of Per Share Earnings
27* Financial Data Schedule
</TABLE>
* Filed herewith
B. REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the
quarter ended July 31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANSTAR CORPORATION
Dated: September 15, 1997 By: /s/Kauko Aronaho
Name: Kauko Aronaho
Title: Senior Vice President and Chief
Financial Officer
18
<PAGE>
Exhibit 11.1
VANSTAR CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE:
Weighted average number of
common shares outstanding................. 42,919 40,475
Common equivalent shares from stock options
using the treasury stock method........... 1,114 2,666
--------- ---------
Shares used in per share calculation........ 44,033 43,141
--------- ---------
--------- ---------
Net Income.................................. $ 6,560 $ 9,763
--------- ---------
--------- ---------
Earnings per share.......................... $ 0.15 $ 0.23
--------- ---------
--------- ---------
FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of
common shares outstanding................. 42,919 40,475
Common equivalent shares from stock options
using the treasury stock method........... 1,314 2,698
--------- ---------
Shares used in per share calculation........ 44,233 43,173
--------- ---------
--------- ---------
Net Income.................................. $ 6,560 $ 9,763
--------- ---------
--------- ---------
Earnings per share.......................... $ 0.15 $ 0.23
--------- ---------
--------- ---------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1ST
QUARTER FORM 10-Q FOR THE FISCAL YEAR 4/30/98 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 10,493
<SECURITIES> 0
<RECEIVABLES> 279,667
<ALLOWANCES> 8,375
<INVENTORY> 470,394
<CURRENT-ASSETS> 777,985
<PP&E> 92,645
<DEPRECIATION> 49,913
<TOTAL-ASSETS> 994,965
<CURRENT-LIABILITIES> 620,543
<BONDS> 4,960
194,603
0
<COMMON> 43
<OTHER-SE> 173,395
<TOTAL-LIABILITY-AND-EQUITY> 994,985
<SALES> 581,249
<TOTAL-REVENUES> 680,634
<CGS> 524,645
<TOTAL-COSTS> 588,056
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,032
<INCOME-PRETAX> 13,732
<INCOME-TAX> 4,944
<INCOME-CONTINUING> 8,788
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,560
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
