<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
VANSTAR CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7373 94-2376431
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
COPY TO:
H. CHRISTOPHER COVINGTON, ESQ.
SENIOR VICE PRESIDENT, STANLEY R. HULLER, ESQ.
GENERAL COUNSEL AND SECRETARY ARTER & HADDEN
5964 WEST LAS POSITAS 1717 MAIN STREET
BOULEVARD SUITE 4100
PLEASANTON, CALIFORNIA 5964 WEST LAS POSITAS BOULEVARD DALLAS, TEXAS
94588-9012 PLEASANTON, CALIFORNIA 94588-9012 75201-4605
(510) 734-4000 (510) 734-4000 (214) 761-2100
(Name, address, including zip
code,
and telephone number, (Address, including zip code, and
including area code, telephone number, including area code, of
of agent for service) registrant's principal executive offices)
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box: /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value.......... 1,132,491 shares (2) $15.44 $17,485,661 $5,299
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(c) of the Securities Act based on the average of
the high and low sales prices on the NYSE Composite Tape on January 29, 1997
(2) Consists of (i) a maximum of 952,491 shares of Company Common Stock issued
to or for the benefit of the shareholders of Contract Data Services, Inc.
("CDS") in connection with the merger of CDS with and into a wholly owned
subsidiary of the Company and (ii) a maximum of 180,000 shares of Company
Common Stock issued for the benefit of DCT Systems, Inc., Niloy, Inc. and
NCT Systems, Inc. (collectively, "DCT") in connection with the sale of
certain assets by DCT to the Company.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION
INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT
WITHOUT NOTICE. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY AN OFFER TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF ANY
STATE.
<PAGE>
PRELIMINARY PROSPECTUS DATED JANUARY 30, 1997
1,132,491 SHARES
VANSTAR CORPORATION
COMMON STOCK
------------------
Vanstar Corporation, a Delaware corporation (the "Company"), originally
issued the 1,132,491 shares (the "Shares") of Company common stock, par value
$.001 per share (the "Company Common Stock"), to the stockholders named herein
(the "Selling Stockholders") in unrelated, private transactions exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act") pursuant to Section 4(2) of the Securities Act and/or
Regulation D promulgated thereunder. All of the Shares offered hereby are being
offered on behalf of and for the account of the Selling Stockholders. The Shares
consist of (i) a maximum of 952,491 shares of Company Common Stock issued to or
for the benefit of the shareholders of Contract Data Services, Inc., a North
Carolina corporation ("CDS"), in connection with the merger of CDS with and into
a wholly owned subsidiary of the Company and (ii) a maximum of 180,000 shares of
Company Common Stock issued for the benefit of DCT Systems, Inc., a Minnesota
corporation, Niloy, Inc., a Georgia corporation, and NCT Systems, Inc., an
Illinois corporation (collectively, "DCT"), in connection with the sale of
certain assets by DCT to the Company (collectively, the "Transactions"). The
Company anticipates that the Shares will be offered for sale, from time to time
after the effectiveness of the Registration Statement of which this Prospectus
forms a part, until the earlier of (a) the sale of all of such Shares or (b)
February , 2000. See "Selling Stockholders." The Company has agreed to pay all
of the expenses of registration in connection with this offering (other than
commissions, concessions or discounts to broker-dealers), but will not receive
any of the proceeds from the sale of the Shares offered hereby. The aggregate
proceeds to the Selling Stockholders from the sale of the Shares will be the
purchase price of the Shares sold less the aggregate brokerage commissions and
discounts, if any, and other expenses of issuance and distribution not borne by
the Company. See "Plan of Distribution" and "Selling Stockholders."
This offering of Shares is currently not being underwritten. However, the
Selling Stockholders and brokers, dealers or underwriters that participate with
the Selling Stockholders in the distribution of the Shares may be deemed
"underwriters," as that term is defined in the Securities Act, and any
commissions received by broker-dealers, agents or underwriters and any profit on
the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. It is anticipated that all
Shares being offered hereby, when sales thereof are made, will be made in one or
more transactions (which may involve one or more block transactions) through
customary brokerage channels, either through brokers acting as brokers or agents
for the sellers, or through dealers or underwriters acting as principals who may
resell the Shares on the New York Stock Exchange ("NYSE") or in privately
negotiated sales, or otherwise, or by a combination of such methods of offering.
Each sale may be made either at market prices prevailing at the time of the
sales or at negotiated prices. See "Plan of Distribution."
To the extent required, the specific Shares to be sold, the names of the
Selling Stockholders, the purchase price, the public offering price, the names
of any agents, dealers or underwriters and any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying Prospectus Supplement.
The Company Common Stock is listed on the NYSE under the symbol "VST." On
January 29, 1997, the closing price of the Company Common Stock on the NYSE
Composite Tape was $14 7/8 per share.
--------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements and other information may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Seven World Trade Center, Suite
1300, New York, New York 10048 and at the Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Reports, proxy and information
statements and other information filed electronically by the Company with the
Commission are available at the Commission's Web site at http:// www.sec.gov. In
addition, copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Such reports, proxy and information statements and other
information concerning the Company may also be inspected at the offices of the
New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the Shares offered by this
Prospectus. This Prospectus, which constitutes part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, a certain portion of which has been omitted as permitted by the Rules
and Regulations of the Commission. For further information with respect to the
Company and the securities offered by this Prospectus, reference is made to the
Registration Statement, which is on file at the offices of the Commission and
may be obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the offices of the Commission or at the Commission's
Web site. Statements contained in this Prospectus as to the contents of any
documents referred to are not necessarily complete, and in each such instance,
are qualified in all respects by reference to the applicable documents filed
with the Commission.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain of the matters discussed in this Prospectus include forward-looking
statements that involve risks and uncertainties. Among the risks and
uncertainties to which the Company is subject are the risks inherent in the
Company's substantial indebtedness, the fact that the Company has experienced
significant fluctuations in revenues and operating results, the Company's
relationship to and business dealings with and with regard to Merisel FAB, Inc.,
the risks associated with managing the Company's inventory in light of product
life cycles and technological change, the Company's relationship with its
significant customers, intense price competition in the Company's markets and
the Company's dependence upon its key vendors. As a result, the actual results
realized by the Company could differ materially from the statements made herein.
Potential investors in this offering are cautioned not to place undue reliance
on the forward-looking statements made in this Prospectus, which speak only as
of the date hereof.
------------------------
This Prospectus includes product names, trade names and trademarks of the
Company and its subsidiaries and of other companies.
2
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." SEE "SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995."
THE COMPANY
The Company is a leading provider of services and products designed to build
and manage personal computer ("PC") network infrastructures, primarily for
Fortune 1000 companies and other large enterprises. The Company provides
customized, integrated solutions for its customers' distributed computing
networks by combining a comprehensive offering of value-added services with its
expertise in sourcing and distributing PCs, network products, computer
peripherals and software from a variety of vendors. These integrated solutions
are designed to support the customer's client/server environments throughout its
life cycle. The Company refers to these solutions as "Life Cycle Management."
Life Cycle Management integrates the offerings of design and consulting,
acquisition and deployment, operation and support, and enhancement and
migration.
Large organizations are becoming increasingly dependent on information
technology to compete effectively in today's global markets. The decision-making
process that organizations face when planning, selecting and implementing
information technology solutions is growing more complex, and, as a result, many
organizations are outsourcing the management and support of their PC network
infrastructure needs. The Company believes that its customers require
increasingly sophisticated PC network systems and support infrastructures. The
Company seeks to satisfy these requirements while seeking to minimize its
customers' internal staff requirements and systems development risk. The Company
enhances the delivery of its services and products with proprietary automated
systems, such as the Vanstar Navigator, and proprietary process methodologies,
such as Horizon, to analyze, design and manage its customers' PC network
infrastructures better. The Company's goal, through the use of these systems and
methodologies, is to reduce the labor component of PC life cycle management and
thereby increase efficiency, reduce costs and make network systems more reliable
and easier to use. The Company's service and product offerings are developed,
delivered and managed by a technical force of over 3,900 employees nationwide,
including a rapidly expanding systems engineering force, which grew from
approximately 200 professionals in March 1994 to approximately 1,400 in December
1996.
The Company believes that certain segments of its industry have begun to
consolidate. In order to maintain its position as a leading provider of PC
network infrastructure solutions to large businesses, the Company believes that
expansion through acquisitions, as well as internal growth, will be necessary.
Effective May 24, 1996, the Company consummated the acquisition of certain of
the assets and business operations of Dataflex Corporation ("Dataflex"),
previously known as the Dataflex Western Region and Dataflex Southwest Region
(the "Dataflex Regions"). These Dataflex Regions offer PC product distribution,
service and support in the states of Arizona, California, Colorado, Nevada, New
Mexico and Utah and reported revenues of approximately $145 million for the
fiscal year ended March 31, 1996. Effective December 16, 1996, the Company
consummated the acquisition of CDS which provides outsourcing of integrated
information technology services, related technical support services and
procurement of computer hardware and software. CDS reported total revenues of
approximately $74.3 million for its fiscal year ended March 31, 1996. In
addition, the Company has recently consummated certain other acquisitions in the
areas of education services and acquisition and deployment services. The Company
expects, for the foreseeable future, to continue to evaluate other potential
acquisition opportunities, and to make additional acquisitions as economic and
market conditions, and the availability of attractive candidates, permit. See
"Selling Stockholders" and "Recent Developments."
3
<PAGE>
In fiscal 1996 and the first six months of fiscal 1997, the Company's
operating performance improved over prior periods due to higher professional
services, and life cycle services and product revenue, higher product gross
margins, decreased fixed costs as a percentage of revenue, as well as cost
reduction efforts and operational improvements. In order to achieve its
objective of continuing to be a leading provider of PC network infrastructure
solutions to large businesses throughout the world, the Company intends to
leverage its broad customer base, to develop and enhance its value-added service
offerings and to expand its worldwide service capabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The principal executive offices of the Company are located at 5964 West Las
Positas Boulevard, Pleasanton, California 94588, and its telephone number is
(510) 734-4000.
THE OFFERING
<TABLE>
<S> <C>
Shares Offered.................... 1,132,491 shares of Company Common Stock(1)
Selling Stockholders.............. The Shares offered hereby were originally issued by the
Company to the Selling Stockholders in unrelated,
private transactions exempt from registration under the
Securities Act pursuant to Section 4(2) of the
Securities Act and/or Regulation D promulgated
thereunder. These stockholders or their transferees,
pledgees, donees or successors, may from time to time
offer and sell the Shares pursuant to this Prospectus.
See "Selling Stockholders."
Percentage of Outstanding Common
Stock Offered by the Selling
Stockholders..................... 2.7%(2)
Use of Proceeds................... The Selling Stockholders will receive all of the
proceeds from the sale of the Shares. The Company will
not receive any proceeds from the sale of the Shares.
NYSE Symbol....................... VST
Risk Factors...................... An investment in the Shares involves a high degree of
risk. See "Risk Factors" for a discussion of certain
factors that should be considered in evaluating an
investment in the Shares.
</TABLE>
- ------------------------
(1) Assumes that all of the shares of Company Common Stock held in escrow for
the benefit of the various Selling Stockholders pursuant to the terms of
certain Escrow Agreements are released to the Selling Stockholders. See
"Selling Stockholders."
(2) Percentage indicated is based upon 42,301,215 shares of Company Common Stock
outstanding on December 31, 1996 but does not include shares of Company
Common Stock issued or issuable by the Company thereafter.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below (other than the
unaudited information as of and for the six months ended October 31, 1995 and
1996) have been derived from the consolidated audited financial statements of
the Company for the periods indicated. The summary unaudited consolidated
financial information as of and for the six months ended October 31, 1995 and
1996, in the opinion of management, reflects all adjustments, consisting only of
a normal recurring nature, necessary for a fair presentation of the consolidated
financial position and consolidated results of operations for interim periods.
The consolidated operating results for the six months ended October 31, 1996 are
not necessarily indicative of the results which may be expected for the full
fiscal year ending April 30, 1997. All of the following information should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements (including the Notes thereto) appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR ENDED MONTHS FISCAL YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, ENDED APRIL 30, OCTOBER 31,
-------------------- APRIL 30, ---------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
-------- ---------- --------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................................... $787,798 $1,099,813 $586,514 $1,385,392 $1,804,813 $872,297 $1,102,823
Cost of revenue................................. 696,518 921,789 489,512 1,174,854 1,559,886 751,050 943,420
Gross margin.................................... 91,280 178,024 97,002 210,538 244,927 121,247 159,403
Selling, general and administrative expenses.... 158,644 181,320 97,436 182,411 201,880 93,134 116,237
Operating income (loss)......................... (76,272) (3,296) (434) 28,127 43,047 28,113 43,166
Interest expense, net........................... 20,242 22,196 11,181 25,978 30,265 (14,994) (9,088)
Income (loss) before income taxes and
distributions on convertible preferred
securities of trust........................... (54,228) (18,751) (6,969) 1,268 8,053 34,078 13,119
Distributions on convertible preferred
securities of trust, net of tax............... -- -- -- -- -- -- (629)
Income from discontinued operations............. 2,261 14,505 51,474 -- 9,194 -- --
Net income (loss)............................... (51,967) (4,246) 44,505 1,268 17,247 8,265 20,840
Earnings per share (1):
Continuing operations......................... 0.04 0.23 0.25 0.49
Discontinued operations....................... -- 0.27 -- --
Total earnings per share.................... 0.04 0.50 0.25 0.49
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
1996
---------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Working capital................................................................................ $ 231,358
Total assets................................................................................... 843,258
Current maturities of long-term debt........................................................... 2,365
Long-term debt, less current maturities........................................................ 3,337
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trust
holding solely convertible subordinated debt securities of the Company (2)................... 194,561
Total stockholders' equity..................................................................... 155,349
</TABLE>
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(1) Earnings per share for the six months ended October 31, 1995 and the fiscal
years ended April 30, 1995 and 1996 give effect to the conversion of all
outstanding shares of Preferred Stock and Class B Common Stock into Company
Common Stock and the exchange of all outstanding warrants for shares of
Company Common Stock in connection with the Company's initial public
offering occurring March 11, 1996 as if the conversion had occurred at the
later of the beginning of the period or the issuance date.
(2) The sole asset of Vanstar Financing Trust is $207,474,200 aggregate
principal amount of the Company's 6 3/4% Convertible Subordinated Debentures
due 2016.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING THE SHARES. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED BELOW. SEE "SAFE HARBOR STATEMENT UNDER PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995."
SIGNIFICANT FLUCTUATIONS IN REVENUES AND OPERATING RESULTS
The Company's quarterly and annual revenues and operating results have
varied significantly in the past and are likely to continue to do so in the
future. Revenues and operating results may fluctuate as a result of the demand
for the Company's products and services, the introduction of new hardware and
software technologies offering improved features, the introduction of new
services by the Company and its competitors, changes in the level of operating
expenses, the timing of major service projects, inventory adjustments,
competitive conditions and economic conditions generally. In particular, the
Company's operating results are highly sensitive to changes in the mix of the
Company's product and service revenues, product margins and interest rates.
Further, the purchase of the Company's products and services generally involves
a significant commitment of capital, with the attendant delays frequently
associated with large capital expenditures and authorization procedures within
an organization. For these and other reasons, the Company's operating results
are subject to a number of significant risks over which the Company has little
or no control, including customers' technology life cycle needs, budgetary
constraints and internal authorization reviews. In addition, the Company
historically has experienced significant revenue fluctuations because of
shortages of supply from certain vendors. Shortages of supplies from vendors
have previously occurred due primarily to credit limitations placed on the
Company. Future limitations of credit by vendors could have a material adverse
effect on the Company. In addition, the general availability of certain
products, particularly state of the art computing and data communications
products, is occasionally restricted. While the Company has not historically
experienced significant product supply shortages, other than due to credit
restrictions as described above, any such shortages in the future could have a
material adverse effect on the Company. The Company is increasing its fixed
operating expenses, including a significant increase in personnel, based on
anticipated revenue growth. To the extent that increased personnel expenses are
incurred prior to related increases in revenues, the Company's operating results
may be adversely affected. In addition, in the event that the growth in the
Company's business does not meet its expectations, the Company may be unable to
adjust its spending levels rapidly enough to avoid an adverse effect upon
operating results. Accordingly, the Company believes that period-to-period
comparisons of its operating results should not be relied upon as an indication
of future performance. In addition, the results of any quarterly period are not
necessarily indicative of results to be expected for a full fiscal year. It is
possible that in certain future periods, the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company Common Stock would likely be materially adversely
affected. See "Summary--Summary Consolidated Financial Data," "--Dependence on
Key Vendors and Product Supply," "Selected Consolidated Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITED HISTORY OF PROFITABILITY; UNCERTAINTY OF FUTURE RESULTS
The Company has a limited history of profitability. The Company experienced
operating losses in the fiscal years ended September 30, 1992 and 1993 and
during the seven months ended April 30, 1994. The Company generated operating
income in fiscal 1995 and 1996 and for the six months ended October 31, 1996.
The Company derives its revenues from four primary sources: products,
professional services (formerly networking), life cycle services (formerly
support services) and other services. The Company has recently increased the
focus of its business on the provision of professional and life cycle services
and
6
<PAGE>
expects to derive an increasingly larger portion of its operating income from
the provision of services. If the Company is not successful in implementing its
strategy of focusing on sales of services, the Company's operating margins could
decline and its ability to maintain profitability could be materially adversely
affected. There can be no assurance that the Company will be able to sustain
profitability on a quarterly or annual basis in the future. See
"Summary--Summary Consolidated Financial Data," "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SUBSTANTIAL INDEBTEDNESS AND FIXED OBLIGATIONS; DEPENDENCE ON IBMCC; INTEREST
RATE SENSITIVITY
The Company's business requires significant working capital to finance
product inventory and accounts receivable. Until recently, the Company has
primarily funded its working capital requirement through its Financing Program
Agreement (the "Financing Program Agreement") with IBMCC. At October 31, 1996,
the outstanding principal balance under the Financing Program Agreement was
approximately $245.7 million, out of a total of $300 million in available
credit. Borrowings under the line of credit are secured by certain assets of the
Company, including accounts receivable, inventory and equipment. The line of
credit is currently available through October 31, 1997 and is renewable
thereafter for successive six-month periods. IBMCC may terminate the Financing
Program Agreement at any time upon 90 days' notice to the Company. In the event
of such termination, the outstanding borrowings under the Financing Program
Agreement mature at the end of the term of the line of credit.
As part of the Company's refinancing plan, the Company used an aggregate of
$300.7 million from the Trust Offering (as defined herein) and the
Securitization Facility (as defined herein) to reduce the Company's outstanding
indebtedness under the Financing Program Agreement. Approximately $82.0 million
remained outstanding under such facility at December 31, 1996, out of a total of
$275 million in available credit on such date. See "Recent Developments." There
can be no assurance that IBMCC will continue to finance the Company's
operations, or if such financing is not continued, that the Company will be able
to secure additional debt financing.
Borrowings under the Financing Program Agreement currently bear interest at
the average of the prime rate announced by Citibank, N.A., The Chase Manhattan
Bank, N.A. and Bank of America National Trust and Savings Association (the
"Prime Rate") minus 0.50% (6% at December 31, 1996). As a result, the Company's
operating results are sensitive to changes in the Prime Rate. An increase in the
Prime Rate could have a material adverse effect on the Company's financial
condition and results of operations. In addition, there can be no assurance that
the Company will be able to generate sufficient operating cash flow to cover
required interest and principal payments when due. If the Company is unable to
meet interest and principal payments in the future, it may, depending upon the
circumstances, seek additional equity or debt financing or attempt to refinance
its existing indebtedness, certain of which transactions could be dilutive to
the holders of the Company Common Stock. There can be no assurance that
sufficient equity or debt financing will be available at all or on terms
acceptable to the Company. If the Company were unable to obtain any required
alternative or additional financing, it would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company currently has substantial fixed obligations (including
indebtedness) in relation to its stockholders' equity and there can be no
assurance that the Company's operating results will be sufficient for payment of
all of its fixed obligations. The degree to which the Company is leveraged could
have important consequences to holders of the Securities, including the
following: (i) the Company's ability to obtain other financing in the future may
be impaired; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness; and (iii) a high degree of leverage may make the Company more
vulnerable to economic downturns and may limit its ability to withstand
competitive pressures. The Company's ability to make scheduled payments on or,
to the extent not restricted pursuant to the terms thereof, to refinance its
indebtedness depends on its
7
<PAGE>
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.
RELATIONSHIP WITH MERISEL FAB, INC.
The Company provides product distribution services to franchisees and
affiliates of Merisel FAB, Inc. ("Merisel FAB") for a fee through its
distribution centers pursuant to a distribution services agreement entered into
in connection with the sale of the Company's United States franchise business to
Merisel FAB in January 1994. Merisel FAB is a wholly-owned subsidiary of
Merisel, Inc. ("Merisel"), whose common stock is publicly traded (Nasdaq: MSEL)
and whose 12.5% senior notes were downgraded from B to CCC+ on April 1, 1996 and
to CCC- on August 16, 1996 by Standard & Poors Corporation. Merisel reported
losses of $2.82 and $4.75 per share for the fiscal year ended December 31, 1995
and the nine months ended September 30, 1996, respectively. Merisel announced
that it has engaged a financial advisor to assist in assessing its strategic
options in order to maximize stockholder value and that it is negotiating with
its lenders regarding potential non-compliance with certain financial covenants
under certain of its loan agreements. Merisel has guaranteed Merisel FAB's
obligations under the distribution services agreement. The distribution services
agreement expires in April 1997. Approximately 40% of the Company's inventory
shipments by dollar volume are made to satisfy its obligations under the
distribution services agreement. For the seven months ended April 30, 1994, the
fiscal year ended April 30, 1995, the fiscal year ended April 30, 1996 and the
six months ended October 31, 1996, revenues derived from Merisel FAB were
approximately $6.1 million, $25.0 million, $21.3 million, and $11.1 million
respectively, representing approximately 1.0%, 1.8%, 1.2%, and 1.0%,
respectively, of total revenue for such periods. Pursuant to its agreement with
the Company, Merisel FAB is obligated to pay the Company for its daily purchases
within two business days, as a result of which the Company typically carries a
receivable balance from Merisel FAB of approximately $9.0 million. Any further
deterioration in the business of Merisel FAB's franchisees and affiliates or in
Merisel FAB's or Merisel's financial condition, including operating losses of
Merisel that may continue beyond its third quarter of 1996, could materially
adversely affect the Company's ability to sell the inventory it holds to satisfy
its obligations under the Merisel distribution and services agreement which
would have a material adverse effect on the Company's financial condition and
results of operations, and could adversely affect the Company's "other services"
revenue. See "--Inventory Management."
DEPENDENCE ON AND NEED TO RECRUIT AND RETAIN KEY MANAGEMENT AND TECHNICAL
PERSONNEL
The Company's success depends to a significant extent on its ability to
attract and retain key personnel. In particular, the Company is dependent on its
senior management team and technical personnel. The Company has significantly
expanded its technical staff. The Company employs over 3,900 technical
professionals and has expanded its systems engineering force from approximately
200 in
8
<PAGE>
March 1994 to approximately 1,400 in December 1996. Competition for such
technical personnel is intense and no assurance can be given that the Company
will be able to recruit and retain such personnel. The failure to recruit and
retain management and technical personnel could have a material adverse effect
on the Company's growth, revenues and results of operations. See
"Business--Employees" and "Management."
MANAGEMENT OF EXPANDING OPERATIONS AND INCREASED SERVICE FOCUS
The Company's growth resulting from expanding operations and acquisitions
has placed significant demands on the Company's management, operational and
technical resources. Furthermore, the Company has increased the focus of its
business operations on the provision of professional and life cycle services.
Such growth and increased service focus are expected to continue to challenge
the Company's sales, marketing, technical and support personnel and senior
management. The Company's future performance will depend in part on its ability
to manage expanding domestic and international operations and to adapt its
operational systems to respond to changes in its business. In particular, the
Company's success will depend on its ability to attract, retain and train
adequate numbers of technical field personnel and effectively integrate any
acquired business operations. The failure of the Company to effectively manage
its growth and increased service focus effectively or to train its technical
field personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE
The markets for the Company's product and service offerings are
characterized by rapidly changing technology and frequent new product and
service offerings. The introduction of new technologies can render existing
products and services obsolete or unmarketable. The Company's continued success
will depend on its ability to enhance existing products and services and to
develop and introduce, on a timely and cost-effective basis, new products and
services that keep pace with technological developments and address increasingly
sophisticated customer requirements. There can be no assurance that the Company
will be successful in identifying, sourcing, developing and marketing product
and service enhancements or new products and services that respond to
technological change, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing of
product and service enhancements or new products and services, or that its
product and service enhancements and new products and services will adequately
meet the requirements of the marketplace and achieve market acceptance. The
Company's business, financial condition and results of operations could be
materially adversely affected if the Company were to incur delays in sourcing
and developing product and service enhancements or new products and services or
if such product and service enhancements or new products and services did not
gain market acceptance. In addition, the Company has developed proprietary
automated systems to enhance the delivery of its services. No assurance can be
given that the Company's automated systems will function as anticipated, will
result in lower costs to the Company or its customers or will not be rendered
obsolete as a result of technological change. See "Business--Automated Systems,
Process Methodologies and Technical Personnel."
DEPENDENCE ON KEY VENDORS AND PRODUCT SUPPLY
A significant portion of the Company's revenue is derived from sales of PC
network hardware, peripherals and software, including products of various major
vendors. The Company's agreements with those vendors from which it purchases
products directly, generally contain provisions for periodic renewals and for
termination by the vendor without cause, generally upon relatively short notice.
Although the Company believes its vendor relationships are good, there can be no
assurance that the Company's relationships will continue as presently in effect.
The loss of a major vendor, the deterioration of the Company's relationship with
a major vendor or the failure of the Company to establish good relationships
9
<PAGE>
with major new vendors as they develop could have a material adverse effect on
the Company's business. As is typical in its industry, the Company receives
credits from most of its vendors for market development, which are used to
offset a portion of the Company's sales and marketing expense. Any change in the
availability of these credits could materially adversely affect the Company's
operating results at least until the Company made appropriate adjustments in its
expense levels. The Company is also dependent, in part, upon vendor financing
for working capital requirements. No assurance can be given that vendor
financing will continue to be available to the Company on satisfactory terms and
conditions, if at all. The failure of the Company to obtain vendor financing on
satisfactory terms and conditions could have a material adverse effect on the
Company's business, financial condition and results of operations.
The personal computer industry experiences product supply shortages and
customer order backlogs from time to time due to the inability of certain
manufacturers to supply certain products on a timely basis. In addition, certain
vendors have initiated new channels of distribution that increase competition
for the available product supply. There can be no assurance that vendors will be
able to maintain an adequate supply of products to fulfill the Company's
customer orders on a timely basis. The Company has experienced product supply
shortages in the past and expects to experience such shortages from time to time
in the future. Failure to obtain adequate product supplies or fulfill customer
orders on a timely basis could have a material adverse effect on the Company's
business, financial condition and results of operations.
INVENTORY MANAGEMENT
The personal computer industry is characterized by rapid product improvement
and technological change resulting in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Although it is industry practice for the Company's suppliers to provide
price protection to the Company intended to reduce the risk of inventory
devaluation, such policies are subject to change. The Company also has the
option of returning, subject to certain limitations, a percentage of its current
product inventories each quarter to certain manufacturers as it assesses each
product's current and forecasted demand. The amount of inventory that can be
returned to suppliers varies under the Company's agreements and such return
policies may provide only limited protection against excess inventory. There can
be no assurance that suppliers will continue such policies, that unforeseen new
product developments will not materially adversely affect the Company or that
the Company can successfully manage its existing and future inventories.
Approximately 40% of the Company's inventory shipments by dollar volume are made
to satisfy its obligations under the distribution services agreement with
Merisel FAB. However, virtually all of the inventory maintained by the Company
is not customer specific and the Company believes that such inventory can be
sold through Merisel FAB franchisees or to other customers or other resellers
or, in some cases, returned to the vendor. Any inventory adjustments could
materially adversely affect the Company's financial condition and results of
operations.
CONCENTRATION OF REVENUES
During the fiscal years ended April 30, 1995 and 1996, and the six months
ended October 31, 1996, Microsoft Corporation accounted for 10.8%, 12.0% and
12.6%, respectively, of the Company's total revenues for such fiscal periods.
During such periods, no other customer accounted for more than 10% of the
Company's total revenues. However, during the first six months of fiscal 1997,
the Company derived approximately 52% of its revenues from its 50 largest
customers. To the extent that the Company is successful in expanding its
relationship with new and existing customers among large enterprises such as the
Fortune 1000, its revenues may become more concentrated. While the Company seeks
to build long-term customer relationships, revenues from any particular customer
can fluctuate from period to period due to such customer's purchasing patterns.
Any termination or significant disruption of the Company's relationships with
any of its principal customers could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
a deterioration in the financial
10
<PAGE>
condition of any of its principal customers could expose the Company to the
possibility of large accounts receivable write-offs, which would materially
adversely affect the Company's financial condition and results of operations.
See "Business--Customers."
INTENSE COMPETITION
The markets in which the Company operates are characterized by intense
competition from several types of technical service providers, including
mainframe and mid-range computer manufacturers and outsourcers entering the
personal computer services marketplace, including Digital Equipment Corporation
MultiVendor Services, Electronic Data Systems Corporation, Hewlett-Packard
Company Multi-Vendor Services and Integrated Systems Solutions Corporation.
Other competitors include VARs, systems integrators and third-party service
companies, including AmeriData Technologies, Inc., CompuCom Systems, Inc.,
DecisionOne, Entex Information Services, InaCom Corp., MicroAge, Inc. and
Technology Service Solutions. The Company expects to face further competition
from new market entrants and possible alliances between competitors in the
future. Certain of the Company's current and potential competitors have greater
financial, technical, marketing and other resources than the Company. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products and services than the Company.
No assurance can be given that the Company will be able to compete successfully
against current and future competitors. See "Business--Competition."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on Company Common
Stock and does not presently intend to pay cash dividends on Common Stock in the
foreseeable future. The Company intends to retain future earnings for
reinvestment in its business. In addition, the Company's Financing Program
Agreement with IBMCC limits the Company's ability to pay cash dividends on its
capital stock. See "Market Prices and Dividend Policy."
ACQUISITIONS
As part of its growth strategy, the Company pursues the acquisition of
companies that sell products and services that either complement or expand its
existing business. As a result, the Company continually evaluates potential
acquisition opportunities, some of which may be material in size and scope. The
Company has recently consummated a number of such acquisitions, including the
Transactions, one or more of which may require substantial Company resources.
See "Recent Developments." Acquisitions, including those recently consummated,
involve a number of special risks, including the diversion of management's
attention to the assimilation of the operations and personnel of the acquired
companies, the incorporation of acquired products and services into the
Company's offerings, adverse short-term effects on the Company's operating
results, the amortization of acquired intangible assets, the loss of key
employees and the difficulty of presenting a unified corporate image. There can
be no assurance that any of the Company's past acquisitions can be integrated
into the Company's operations successfully.
Although the Company is frequently in discussions with acquisition
candidates, it is not now a party to any binding commitments or agreements to
proceed with regard thereto other than as discussed under "Recent Developments."
The Company anticipates that one or more other acquisition opportunities may
become available in the near future. The Company intends to actively pursue
existing and future acquisition opportunities. No assurance can be given that
the Company will have adequate resources to consummate any acquisition, that any
acquisition by the Company will or will not occur, that if any acquisition does
occur it will not materially adversely affect the Company or that any such
acquisition will be successful in enhancing the Company's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Furthermore, the Company may issue shares of Company Common Stock
in connection with any or all future acquisitions, the aggregate number of which
may be
11
<PAGE>
significant. As a result, the ownership interest of prior purchasers of Company
Common Stock, including purchasers of the Shares offered thereby, will be
diluted. Although the Company expects that the assets and revenues of these
acquisition candidates will be accretive to the Company's financial condition
and prospects, there can be no assurance that there will not be a dilution in
the value of the Shares offered hereby.
The Company's ability to consummate acquisitions will be limited by the
availability of attractive candidates at appropriate terms, the Company's
capital resources and prevailing economic and market conditions. There can be no
assurance that the Company will be able to consummate any future acquisitions on
a timely basis or that, if consummated, such acquisitions will be integrated
into the Company's operations successfully. Similarly, there can be no assurance
that any such acquisitions will provide the anticipated economic benefits to the
Company.
PROTECTION OF INTELLECTUAL PROPERTY
The Company seeks to protect its proprietary software, systems and processes
through copyright, trademark and trade secret laws and contractual restrictions
on disclosure and copying. Despite such measures, it may be possible for
unauthorized third parties to copy aspects of the Company's software, systems
and processes or to obtain and use information that the Company regards as
proprietary. In addition, no assurance can be given that the protective measures
taken by the Company will be sufficient to preclude competitors from developing
competing or similar proprietary software, systems and processes.
SHARES SUBJECT TO SALE; POSSIBLE VOLATILITY OF THE PRICE OF COMPANY COMMON STOCK
As of December 31, 1996, there were 42,301,215 shares of Company Common
Stock outstanding, of which 15,987,571 shares were issued in the Company's IPO
in March 1996 and were generally tradeable in the public market without
restriction unless acquired by an affiliate of the Company. Of the remaining
shares of outstanding Company Common Stock, approximately 19,786,151 shares
became eligible for sale without registration pursuant to Rule 144 under the
Securities Act (the "Restricted Shares") within the 180 day period subsequent to
the effective date of the IPO. Although the sales of certain of the Restricted
Shares are subject to volume and other limitations set forth in Rule 144, which
generally restrict the number of such shares that can be sold and the manner in
which they may be sold, absent other restrictions, such shares may be sold in
the public market. Sales of a substantial number of shares of Company Common
Stock in the public market, or the perception that such sales could occur, could
materially adversely affect the prevailing market price of the Company Common
Stock. The market price of the Company Common Stock may also be subject to wide
fluctuations in price and volume in response to quarterly variations in the
Company's results of operations, changes in earnings estimates by research
analysts, conditions in the personal computer industry or general market or
economic conditions. In recent years, the stock market has experienced extreme
price and volume fluctuations. These fluctuations have had a substantial effect
on the market prices for many technology companies, and often appear unrelated
to the operating performance of the specific companies involved. Such market
fluctuations could materially adversely affect the market price for the Company
Common Stock. See "Market Prices and Dividend Policy," "Security Ownership of
Principal Stockholders and Management," "Selling Stockholders," and "Plan of
Distribution."
CONTROL OF THE COMPANY
As of December 31, 1996, Warburg, Pincus Capital Company, L.P. ("CapCo"),
which is controlled by Warburg, Pincus & Co., beneficially owned an aggregate of
13,878,401.21 shares of Company Common Stock (representing approximately 32.8%
of the issued and outstanding shares of Company Common Stock as of such date).
Due to its ownership position, CapCo has significant influence over the
management and policies of the Company. CapCo's ownership position also may
render it more difficult for a third party to effect a change of control of the
Company without the consent of CapCo and may thereby
12
<PAGE>
discourage third parties from any attempt to acquire control of the Company,
which could have a material adverse effect on the price of the Company Common
Stock. See "Security Ownership of Principal Stockholders and Management."
Moreover, as of December 31, 1996, the principal stockholders, directors and
executive officers of the Company beneficially owned approximately 39.8% of the
Company Common Stock. As a result, such stockholders, if they act in concert,
may be able to effectively control the election of members of the Company's
Board of Directors and generally to exercise control over the Company's
corporate actions. See "Security Ownership of Principal Stockholders and
Management."
ANTI-TAKEOVER EFFECTS OF UNISSUED PREFERRED STOCK AND DELAWARE LAW
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may be deemed to have an anti-takeover effect. The Company's
Certificate of Incorporation provides that the Board of Directors may issue
additional shares of common stock or establish one or more classes or series of
preferred stock with such designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the Board of
Directors deems appropriate without stockholder approval. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a business combination
with an interested stockholder for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. Each of the foregoing
provisions gives the Board of Directors, acting without stockholder approval,
the ability to prevent, or render more difficult or costly, the completion of a
takeover transaction that stockholders might view as being in their best
interests, including a takeover transaction that might result in a premium over
the market price for the shares of Company Common Stock.
THE COMPANY
The Company is a leading provider of services and products designed to build
and manage PC network infrastructures. The Company Common Stock was listed on
the NYSE following its IPO on March 11, 1996 and trades under the symbol "VST."
The Company's current business capabilities were developed internally and
through acquisitions. These strategic acquisitions included: (i) the acquisition
from 1990 through 1992, of 23 of the Company's franchisees, operating in 33
major United States metropolitan markets; (ii) the 1991 acquisition of NYNEX
Business Centers; (iii) the 1992 acquisition of the Customer Services Division
of TRW, Inc.; and (iv) the 1996 acquisitions of the Dataflex Regions and CDS. In
fiscal 1994, the Company sold its remaining United States franchise business to
Merisel FAB, adopted the name Vanstar Corporation, and changed its fiscal year
end from September 30 to April 30.
The Company was incorporated in Delaware in September 1987 under the name
ComputerLand Corporation following the acquisition by William Y. Tauscher, CapCo
and Richard H. Bard of the majority of the capital stock of the Company's
predecessor, IMS Associates, Inc. ("IMS"), which was originally incorporated in
1976. IMS was merged with the Company after such acquisition. At the time of the
acquisition, the Company operated and franchised computer retail stores in the
United States.
The executive offices of the Company are located at 5964 West Las Positas
Boulevard, Pleasanton, California 94588, and the telephone number of the
executive offices is (510) 734-4000.
13
<PAGE>
MARKET PRICES AND DIVIDEND POLICY
The Company Common Stock began trading publicly on the NYSE under the symbol
"VST" effective March 11, 1996. The following table sets forth, for the periods
indicated, the range of high and low closing sales prices for the Company Common
Stock on the NYSE since March 11, 1996.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fiscal Year Ended April 30, 1996
Fourth Quarter (March 11, 1996 through April 30, 1996).... $ 15 $ 9 3/8
Fiscal Year Ending April 30, 1997
First Quarter............................................. 17 1/8 13 3/4
Second Quarter............................................ 29 16 3/4
Third Quarter (through January 29, 1997).................. 28 14 7/8
</TABLE>
As of December 20, 1996, there were approximately 291 holders of record of
the Company Common Stock. On January 29, 1997, the closing price reported on the
NYSE for the Company Common Stock was $14 7/8 per share.
The Company has never declared or paid any cash dividends on the Company
Common Stock and does not presently intend to pay cash dividends on the Company
Common Stock in the foreseeable future. The Company intends to retain future
earnings for reinvestment in its business. The Company's Financing Program
Agreement with IBMCC limits the Company's ability to declare or pay cash
dividends on the Company Common Stock. See "Risk Factors--Restrictive
Covenants." Any determination to declare or pay cash dividends in the future
will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant at the time by the
Company's Board of Directors.
Distributions on the 6 3/4% Trust Convertible Preferred Securities (the
"Trust Preferred Securities") issued in connection with the Trust Offering by
Vanstar Financing Trust, which for accounting purposes is treated as a
subsidiary of the Company (the "Trust"), have accrued from October 2, 1996 and
are payable at the annual rate of 6 3/4% of the liquidation amount of $50 per
Trust Preferred Security. Subject to the Company's right to defer interest
payments on the Convertible Debentures and the attendant deferral of
distributions on the Trust Preferred Securities, distributions on the Trust
Preferred Securities will be payable quarterly in arrears on each January 1,
April 1, July 1 and October 1. In the event the Company's interest payment
deferral option is exercised, then, during such period, the Company may not,
among other things, declare or pay dividends on, or make distributions with
respect to, its capital stock except dividends or distributions in shares of
Company Common Stock on Company Common Stock or on its Preferred Stock. See
"Recent Developments."
14
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization and cash and
cash equivalents of the Company at October 31, 1996. This table should be read
in conjunction with the Consolidated Financial Statements (including the Notes
thereto) appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31,
1996
-------------
(IN
THOUSANDS,
EXCEPT SHARE
DATA)
<S> <C>
Cash and cash equivalents.......................................................................... $ 12,090
-------------
-------------
Current maturities of long-term debt............................................................... 2,365
Long-term debt, less current maturities............................................................ 3,337
-------------
Total long-term debt........................................................................... 5,702
-------------
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary trust
holding solely convertible subordinated debt securities of the Company (1)....................... 194,561
Stockholders' equity:
Common stock; $.001 par value; 100,000,000 shares authorized, 41,465,250 shares issued and
outstanding.................................................................................... 41
Additional paid-in capital....................................................................... 122,552
Retained earnings................................................................................ 32,756
-------------
Total stockholders' equity..................................................................... 155,349
-------------
Total capitalization......................................................................... $ 355,612
-------------
-------------
</TABLE>
- ------------------------
(1) For financial reporting purposes, the Trust is treated as a subsidiary of
the Company and, accordingly, the accounts of the Trust are included in the
consolidated financial statements of the Company. Transactions between the
Company and the Trust, including those relating to the Convertible
Debentures, are eliminated for consolidated financial reporting. The sole
asset of the Trust is $207,474,200 aggregate principal amount of the
Company's 6 3/4% Convertible Subordinated Debentures due 2016.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for the years ended
April 30, 1996 and 1995, and the seven months ended April 30, 1994, and the year
ended September 30, 1993 were derived from the audited consolidated financial
statements, which are included elsewhere in this Prospectus. The selected
consolidated financial data presented below for the years ended September 30,
1992 and 1991 were derived from audited consolidated financial statements of the
Company, which are not included in this Prospectus. The selected consolidated
financial data presented below for the six months ended October 31, 1995 and
1996 are unaudited but have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, includes
all adjustments, consisting only of normal recurring adjustments, which the
Company considers necessary for a fair presentation of the financial information
set forth therein. The results of operations for the six months ended October
31, 1996 are not necessarily indicative of results that may be expected for the
Company's fiscal year ending April 30, 1997. This selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements (including the Notes thereto) appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR ENDED SEPTEMBER MONTHS FISCAL YEAR ENDED SIX MONTHS ENDED
30, ENDED APRIL 30, OCTOBER 31,
------------------------------ APRIL 30, ---------------------- --------------------
1991 1992 1993 1994 1995 1996 1995 1996
-------- -------- ---------- --------- ---------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue............................... $213,738 $787,798 $1,099,813 $586,514 $1,385,392 $1,804,813 $872,297 $1,102,823
Cost of revenue....................... 180,141 696,518 921,789 489,512 1,174,854 1,559,886 751,050 943,420
Gross margin.......................... 33,597 91,280 178,024 97,002 210,538 244,927 121,247 159,403
Selling, general and administrative
expenses............................ 48,485 158,644 181,320 97,436 182,411 201,880 93,134 116,237
Operating income (loss)............... (14,888) (76,272) (3,296) (434) 28,127 43,047 28,113 43,166
Interest expense, net................. 11,019 20,242 22,196 11,181 25,978 30,265 (14,994) (9,088)
Income (loss) before income taxes and
distributions on convertible
preferred securities of trust....... (15,803) (54,228) (18,751) (6,969) 1,268 8,053 34,078 13,119
Distributions on convertible preferred
securities of trust, net of tax..... -- -- -- -- -- -- -- (629)
Income from discontinued operations... 25,320 2,261 14,505 51,474 -- 9,194 -- --
Net income (loss)..................... 9,517 (51,967) (4,246) 44,505 1,268 17,247 8,265 20,840
Earnings per share (1):
Continuing operations............... 0.04 0.23 0.25 0.49
Discontinued operations............. -- 0.27 -- --
Total earnings per share.......... 0.04 0.50 0.25 0.49
Shares used in computing earnings per
share (1)........................... 32,486 34,250 33,029 42,440
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, APRIL 30,
------------------------------ ---------------------------- OCTOBER 31,
1991 1992 1993 1994 1995 1996 1996
-------- --------- --------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)........................... $(14,554) $(107,441) $(114,902) $(73,511) $267,852 $315,742 $231,358
Total assets........................................ 598,730 700,035 576,279 610,458 705,295 803,365 843,258
Short-term borrowings............................... 158,124 227,692 194,660 262,783 -- -- 115,625
Current maturities of long-term debt................ 6,836 14,898 23,190 12,788 7,685 1,759 2,365
Long-term debt, less current maturities............. 46,630 32,219 13,017 6,732 337,750 293,007 3,337
Redeemable preferred stock and accrued dividends.... 3,559 3,986 4,464 4,777 -- -- --
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding
solely convertible subordinated debt securities of
the Company (2)................................... -- -- -- -- -- -- 194,561
Total stockholders' equity.......................... 56,049 684 13,584 24,797 22,589 127,053 155,349
</TABLE>
- ------------------------------
(1) Earnings per share for the six months ended October 31, 1995 and the fiscal
years ended April 30, 1995 and 1996 give effect to the conversion of all
outstanding shares of Preferred Stock and Class B Common Stock into Company
Common Stock and the exchange of all outstanding warrants for shares of
Company Common Stock in connection with the Company's IPO as if the
conversion had occurred at the later of the beginning of the period or the
issuance date.
(2) The sole asset of the Trust is $207,474,200 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2016.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." SEE "SAFE HARBOR STATEMENT UNDER
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995."
RESULTS OF OPERATIONS
The Company's four primary sources of revenue are: product, professional
services, life cycle services and other services. The Company refers to the
integration of its product and service offerings designed to provide customized
solutions to support its customers' PC network infrastructure throughout its
life cycle as "Life Cycle Management." Product revenue is primarily derived from
the sale of computer hardware, software, peripherals and communications devices
manufactured by third parties and sold by the Company. During the first quarter
of fiscal year 1997, the Company realigned its service offerings to position
itself to better meet its customers' growing need to gain control of the
management and the escalating cost of distributed computing network
infrastructures. Professional services (formerly networking) revenue is derived
from network installation, enhancement and migration plus consulting services to
plan, design, manage, and implement new client/server technologies. Life cycle
services (formerly support services) revenue is derived from desktop support
services which encompass customized service, enhancement, and support solutions
required as a result of customer's outsourcing the ownership and management of
client/ server environments. Desktop support services integrates the services of
desktop support, help desk, repair and maintenance, asset management, and
desktop installation. Other services revenue is primarily derived from fees
earned on the distribution services agreement with Merisel FAB and training and
education services. Pursuant to the distribution services agreement, the Company
provides product distribution to franchisees and affiliates of Merisel FAB (see
Note 2 of Notes to Consolidated Financial Statements).
The Company disposed of most of its franchise business during 1994. The
largest of these sales occurred on January 31, 1994, when the Company sold
certain assets and liabilities of its United States franchise business,
including all domestic franchise agreements, Datago distribution agreements and
the right to the "ComputerLand" name and trademark within the United States to
Merisel FAB (see Note 2 of Notes to Consolidated Financial Statements).
In April 1994, the Company changed its fiscal year from September 30 to
April 30. Therefore, the Company is using annualized information for the seven
months ended April 30, 1994 ("1994") for purposes of comparison to the year
ended April 30, 1995 ("1995") and the year ended September 30, 1993 ("1993").
The annualized information for the period ended April 30, 1994 does not
represent actual operating results that would have been achieved for a full
fiscal year.
The following tables set forth for the periods indicated, the Company's (i)
total revenue, gross margin and gross margin percentage by revenue source, (ii)
selling, general and administrative expenses in total
17
<PAGE>
and as a percentage of total revenue and (iii) operating income (loss) in total
and as a percentage of total revenue.
<TABLE>
<CAPTION>
SEVEN
FISCAL YEAR MONTHS FISCAL YEAR ENDED APRIL SIX MONTHS ENDED OCTOBER
ENDED ENDED 30, 31,
SEPTEMBER 30, APRIL 30, -------------------------- ------------------------
1993 1994 1995 1996 1995 1996
------------- ---------- ------------ ------------ ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product............................. $ 935,165 $ 490,576 $ 1,187,392 $ 1,578,298 $ 763,113 $ 953,122
Services:
Professional services............. 15,652 9,829 31,842 58,127 24,416 49,298
Life cycle services............... 143,553 76,785 131,194 138,418 67,515 81,471
Other services.................... 5,443 9,324 34,964 29,970 17,253 18,932
------------- ---------- ------------ ------------ ---------- ------------
Total revenue................... $1,099,813 $ 586,514 $ 1,385,392 $ 1,804,813 $ 872,297 $ 1,102,823
------------- ---------- ------------ ------------ ---------- ------------
------------- ---------- ------------ ------------ ---------- ------------
Gross margin:
Product............................. $ 110,651 $ 53,261 $ 113,513 $ 147,894 $ 70,797 $ 94,913
Services:
Professional services............. 7,525 3,291 13,111 23,013 11,237 20,690
Life cycle services............... 57,320 33,001 55,053 49,131 24,514 29,033
Other services.................... 2,528 7,449 28,861 24,889 14,699 14,767
------------- ---------- ------------ ------------ ---------- ------------
Total gross margin.............. $ 178,024 $ 97,002 $ 210,538 $ 244,927 $ 121,247 $ 159,403
------------- ---------- ------------ ------------ ---------- ------------
------------- ---------- ------------ ------------ ---------- ------------
Gross margin percentage:
Product............................. 11.8% 10.9% 9.6% 9.4% 9.3% 10.0%
Services:
Professional services............. 48.1% 33.5% 41.2% 39.6% 46.0% 42.0%
Life cycle services............... 39.9% 43.0% 42.0% 35.5% 36.3% 35.6%
Other services.................... 46.4% 79.9% 82.5% 83.0% 85.2% 78.0%
------------- ---------- ------------ ------------ ---------- ------------
Total gross margin percentage... 16.2% 16.5% 15.2% 13.6% 13.9% 14.5%
------------- ---------- ------------ ------------ ---------- ------------
------------- ---------- ------------ ------------ ---------- ------------
Selling, general and administrative
expenses.......................... $ 181,320 $ 97,436 $ 182,411 $ 201,880 $ 93,134 $ 116,237
% of total revenue.................. 16.5% 16.6% 13.2% 11.2% 10.7% 10.5%
Operating income (loss)............. $ (3,296) $ (434) $ 28,127 $ 43,047 $ 28,113 $ 43,166
% of total revenue.................. (0.3)% (0.1)% 2.0% 2.4% 3.2% 3.9%
</TABLE>
SIX MONTHS ENDED OCTOBER 31, 1996 AS COMPARED TO THE SIX MONTHS ENDED OCTOBER
31, 1995
PRODUCT. Revenue increased 24.9% to $953.1 million for the six months ended
October 31, 1996 from $763.1 million for the six months ended October 31, 1995
as a result of the Company's successful sales and marketing efforts and
increased sales resulting from the acquisition of the Dataflex Regions. Gross
margin increased 34.1% to $94.9 million for the six months ended October 31,
1996 from $70.8 million for the six months ended October 31, 1995. Gross margin
percentage increased to 10.0% for the six months ended October 31, 1996 from
9.3% for the six months ended October 31, 1995. The increase in gross margin
reflects the changing nature of the Company's relationships with its customers
in moving towards longer-term procurement services relationships as opposed to
periodic commodity buying.
PROFESSIONAL SERVICES. Revenue increased 101.9% to $49.3 million for the
six months ended October 31, 1996 from $24.4 million for the six months ended
October 31, 1995. This increase was a result of increasing customer demand for
the Company's higher-end consulting services, as well as the Company's increased
capacity to deliver such services. The Company believes that increased customer
demand resulted from the continuing transition by the Company's customers to new
higher performance technologies and increased utilization of client/server
networks. By the end of October 1996, the Company employed approximately 1,100
system engineers as compared to approximately 600 in October 1995. Gross margin
increased 84.1% to $20.7 million for the six months ended October 31, 1996 from
$11.2 million for the six months ended October 31, 1995. Gross margin percentage
decreased to 42.0% for the six months
18
<PAGE>
ended October 31, 1996 from 46.0% for the six months ended October 31, 1995. The
decrease in gross margin percentage resulted from an increase in transitional
training and deployment costs reflecting the Company's continued commitment to
hire and train additional systems engineers to support Microsoft NT.
LIFE CYCLE SERVICES. Revenue increased 20.7% to $81.5 million for the six
months ended October 31, 1996 from $67.5 million for the six months ended
October 31, 1995. This increase reflects the increase in demand for the
Company's overall life cycle service offerings. Gross margin increased 18.4% to
$29.0 million for the six months ended October 31, 1996 from $24.5 million for
the six months ended October 31, 1995. Gross margin percentage decreased
slightly to 35.6% for the six months ended October 31, 1996 from 36.3% for the
six months ended October 31, 1995.
OTHER SERVICES. Revenue increased 9.7% to $18.9 million for the six months
ended October 31, 1996 from $17.3 million for the six months ended October 31,
1995 primarily due to the acquisition of Mentor Technologies, Ltd., an Ohio
limited partnership (the "Mentor Partnership"). Gross margin increased 0.5% to
$14.8 million for the six months ended October 31, 1996 from $14.7 million for
the six months ended October 31, 1995. Gross margin percentage decreased to
78.0% for the six months ended October 31, 1996 from 85.2% for the six months
ended October 31, 1995. The decline in gross margin percentage was primarily the
result of the higher contribution of training and education revenue to total
other services revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 24.8% to $116.2 million for the six months
ended October 31, 1996 from $93.1 million for the six months ended October 31,
1995. Selling, general and administrative expenses as a percentage of revenue
decreased to 10.5% for the six months ended October 31, 1996 from 10.7% for the
six months ended October 31, 1995.
OPERATING INCOME. Operating income increased 53.5% to $43.2 million for the
six months ended October 31, 1996 from $28.1 million for the six months ended
October 31, 1995. This increase was the result of the increases in revenue,
gross margin percentage, and a decrease in selling, general and administrative
expenses as a percentage of revenue. Operating income as a percentage of total
revenue increased to 3.9% for the six months ended October 31, 1996 from 3.2%
for the six months ended October 31, 1995.
INTEREST. Interest expense is incurred primarily on borrowings under the
Company's Financing Program Agreement with IBMCC. Interest expense decreased
39.3% to $10.9 million for the six months ended October 31, 1996 from $17.9
million for the six months ended October 31, 1995 due to lower average
borrowings and lower interest rates. The decline in borrowings was the result of
improved cash flow from increased profitability combined with the issuance of
the Trust Preferred Securities.
TAXES. The effective tax rate for the six months ended October 31, 1996 and
October 31, 1995 of 37% was different than the U.S. statutory rate of 35% due to
state tax provisions.
DISTRIBUTIONS ON CONVERTIBLE PREFERRED SECURITIES OF TRUST, NET OF TAX. In
October, 1996, the Trust issued 4,025,000 Trust Preferred Securities as part of
a refinancing plan to reduce its overall interest costs. Distributions on the
Trust Preferred Securities accrue at an annual rate of 6 3/4% of the liquidation
value of $50 per security and are included net of the tax effect on the
associated Convertible Debentures in "Distributions on convertible preferred
securities of trust, net of tax" in the consolidated statements of income. (See
Note 3 of Notes to Consolidated Financial Statements.)
YEAR ENDED APRIL 30, 1996 AS COMPARED TO THE YEAR ENDED APRIL 30, 1995
PRODUCT. Revenue increased 32.9% to $1.6 billion for the year ended April
30, 1996 from $1.2 billion for the year ended April 30, 1995 as a result of the
Company's successful sales and marketing efforts and
19
<PAGE>
strengthened market position. Gross margin increased 30.3% to $147.9 million for
the year ended April 30, 1996 from $113.5 million for the year ended April 30,
1995. Gross margin percentage decreased to 9.4% for the year ended April 30,
1996 from 9.6% for the year ended April 30, 1995 due to the Company's emphasis
on larger customers which resulted in lower gross margin percentages but higher
sales volumes that more than offset the associated increase in distribution
costs.
PROFESSIONAL SERVICES (FORMERLY NETWORKING). Revenue increased 82.5% to
$58.1 million for the year ended April 30, 1996 from $31.8 million for the year
ended April 30, 1995. This increase reflects the increased customer demand for
the Company's value-added PC network service offerings. Gross margin increased
75.5% to $23.0 million for the year ended April 30, 1996 from $13.1 million for
the year ended April 30, 1995. Gross margin percentage decreased to 39.6% for
the year ended April 30, 1996 from 41.2% for the year ended April 30, 1995 due
to increased investments in systems engineers.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES). Revenue increased 5.5% to
$138.4 million for the year ended April 30, 1996 from $131.2 million for the
year ended April 30, 1995. This increase reflects the growth in support services
related to increased product sales which more than offset a decline in repair
and maintenance services attributable to improved product reliability and a
shift by vendors to extended warranty programs. Gross margin decreased 10.8% to
$49.1 million for the year ended April 30, 1996 from $55.1 million for the year
ended April 30, 1995. Gross margin percentage decreased to 35.5% for the year
ended April 30, 1996 from 42.0% for the year ended April 30, 1995, as a result
of startup costs associated with newly obtained contracts.
OTHER SERVICES. Revenue decreased 14.3% to $30.0 million for the year ended
April 30, 1996 from $35.0 million for the year ended April 30, 1995. The
decrease was the result of a negotiated reduction in the distribution fee from
Merisel FAB and reduced demand for the Company's training services. Gross margin
decreased to $24.9 million for the year ended April 30, 1996 from $28.9 million
for the year ended April 30, 1995 while the gross margin percentage remained
relatively constant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10.7% to $201.9 million for the year ended
April 30, 1996 from $182.4 million for the year ended April 30, 1995. Selling,
general and administrative expenses as a percentage of total revenue decreased
to 11.2% for the year ended April 30, 1996 from 13.2% for the year ended April
30, 1995. This decrease is due to higher volumes of product and networking
revenue that more than offset the increase in associated fixed costs as well as
cost reduction efforts to consolidate administrative functions and centralize
branches.
OPERATING INCOME. Operating income increased 53.0% to $43.0 million for the
year ended April 30, 1996 from $28.1 million for the year ended April 30, 1995.
Operating income as a percentage of total revenue increased to 2.4% for the year
ended April 30, 1996 from 2.0% for the year ended April 30, 1995 as the decrease
in selling, general and administrative expenses as a percentage of total revenue
more than offset the decrease in the total gross margin percentage.
INTEREST. Interest expense is incurred primarily on borrowings to support
the working capital requirements of the products line of business and the
Merisel FAB distribution services agreement. Interest expense increased 10.0% to
$35.8 million for the year ended April 30, 1996 from $32.6 million for the year
ended April 30, 1995 due principally to higher average borrowings during fiscal
year 1996 related to increased inventory levels and receivable balances as a
result of the significant growth in products revenue. Interest income decreased
15.8% to $5.5 million from $6.6 million as the Company was paid in full on a
significant note receivable during the first quarter of fiscal year 1996.
TAXES. The effective tax rate for the year ended April 30, 1996 of 37.0%
and 1995 of 41.0% was different than the U.S. statutory rate of 35.0% primarily
due to state tax provisions.
20
<PAGE>
FISCAL YEAR ENDED APRIL 30, 1995 AS COMPARED TO THE ANNUALIZED SEVEN MONTHS
ENDED APRIL 30, 1994
PRODUCT. Revenue increased 41.2% in 1995 from 1994, primarily because cash
generated from the sale of the Company's U.S. franchise business enabled the
Company to meet increased customer demand through improved product stocking
levels. Gross margin increased 24.3% in 1995 from 1994 while the gross margin
percentage decreased to 9.6% in 1995 from 10.9% in 1994. This decrease was the
result of the Company's emphasis on larger customers which resulted in lower
gross margin percentages but higher sales volumes that more than offset the
associated increase in distributed costs.
PROFESSIONAL SERVICES (FORMERLY NETWORKING). Revenue increased 89.0% in
1995 from 1994 due to a significant increase in the Company's capacity to meet
increased demand for value-added networking services. This increase in capacity
was a result of the Company's investments in hiring and training systems
engineers in prior periods. Gross margin increased 132.4% in 1995 from 1994.
Gross margin percentage increased to 41.2% in 1995 from 33.5% in 1994 as a
result of the increased utilization of the Company's systems engineers.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES). Revenue decreased 0.3% in
1995 from 1994. Gross margin decreased 2.7% in 1995 from 1994. Gross margin
percentage decreased to 42.0% in 1995 from 43.0% in 1994, as a result of annual
wage rate increases which were not offset by increased revenue.
OTHER SERVICES. Revenue increased 118.7% in 1995 from 1994. This increase
is primarily attributable to the fees derived from the Merisel FAB distribution
services agreement, which began in February 1994. Gross margin increased 126.0%
in 1995 from 1994. Gross margin percentage increased to 82.5% in 1995 from 79.9%
in 1994 resulting from an increase in revenue without a commensurate increase in
cost of services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 9.2% in 1995 from 1994. Selling, general and
administrative expenses as a percentage of total revenue decreased to 13.2% in
1995 from 16.6% in 1994, due to the cost reduction efforts to consolidate sales
administration activities and to the effect of higher volumes of product and
networking that more than offset the increase in associated fixed costs.
OPERATING INCOME (LOSS). Operating income increased to $28.1 million in
1995 from an operating loss in 1994 as the decline in selling, general and
administrative expenses as a percentage of total revenue and the increase in
networking gross margin percentage more than offset the decline in the products
gross margin percentage.
INTEREST. Interest expense increased 48.5% in 1995 from 1994 due
principally to higher borrowings related to increased inventory levels and
receivable balances as a result of the significant growth in products revenue,
combined with increases in the prime rate throughout calendar 1994. Interest
income during 1994 consisted primarily of earnings on a long-term note
receivable. Interest income during 1995 consisted primarily of early pay
discounts.
TAXES. The effective tax rate for 1995 of 41.0% and 1994 of 40.0% was
different than the U.S. statutory rate of 35.0% primarily due to the state tax
provision and benefit, respectively.
ANNUALIZED SEVEN MONTHS ENDED APRIL 30, 1994 AS COMPARED TO THE FISCAL YEAR
ENDED SEPTEMBER 30, 1993
PRODUCT. Revenue decreased 10.1% in 1994 from 1993 primarily due to
limitations on product stocking levels resulting from working capital
constraints. Gross margin decreased 17.5% in 1994 from 1993. Gross margin
percentage also decreased to 10.9% in 1994 from 11.8% in 1993.
21
<PAGE>
PROFESSIONAL SERVICES (FORMERLY NETWORKING). Revenue increased 7.7% in 1994
from 1993 due to the increased demand for the Company's high-end, value-added
networking services. Gross margin decreased 25.0% in 1994 from 1993. Gross
margin percentage declined to 33.5% in 1994 from 48.1% in 1993 as a result of
costs associated with hiring and training new systems engineers in anticipation
of the future growth in networking revenue.
LIFE CYCLE SERVICES (FORMERLY SUPPORT SERVICES). Revenue decreased 8.3% in
1994 from 1993 due to the elimination by the Company of several large contracts.
Gross margin decreased 1.3% in 1994 from 1993. Gross margin percentage increased
to 43.0% in 1994 from 39.9% in 1993, due to higher utilization of field
engineers.
OTHER SERVICES. Revenue increased 193.7% in 1994 from 1993 due to the
inclusion of fees derived from the Merisel FAB distribution services agreement.
Gross margin significantly increased in 1994 from 1993. Gross margin percentage
increased to 79.9% in 1994 from 46.4% in 1993 due to the implementation of the
Merisel FAB distribution services agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased 7.9% in 1994 from 1993. Selling, general and
administrative expenses as a percentage of total revenue increased slightly to
16.6% in 1994 from 16.5% in 1993.
OPERATING LOSS. The operating loss was significantly reduced in 1994 from
1993 as the increase in other services gross margin percentage due to the new
Merisel FAB agreement more than offset the decrease in products and networking
gross margin.
INTEREST. Interest expense decreased 4.9% in 1994 from 1993. Interest
income during 1994 and 1993 consisted primarily of earnings on a long-term note
receivable.
TAXES. The effective income tax rate for the seven months ended April 30,
1994 of 40.0% was different than the U.S. statutory rate of 35.0% due primarily
to the state tax provision. The effective tax rate for 1993 of 26.4% was lower
than the U.S. statutory rate of 34.0% primarily due to unbenefitted current year
losses partially offset by state tax benefits.
QUARTERLY OPERATING RESULTS
The following table sets forth the unaudited operating results for each of
the four quarters in fiscal 1995 and fiscal 1996 and for the first two quarters
of fiscal 1997. In the opinion of management, this information has been prepared
on the same basis as the audited consolidated financial statements and includes
all necessary adjustments (consisting only of normal recurring adjustments) that
the Company considers necessary to present fairly such information. The table
should be read in conjunction with the audited consolidated financial statements
of the Company and notes thereto incorporated by reference in
22
<PAGE>
this Prospectus. The Company's quarterly results have in the past been subject
to fluctuations and, as a result, the operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product.................. $251,618 $289,819 $303,171 $342,784 $374,083 $389,030 $391,130 $424,055 $490,065 $463,057
Services:
Professional
services............. 6,247 7,552 8,508 9,535 10,855 13,561 16,514 17,197 21,698 27,600
Life cycle services.... 32,562 32,361 32,587 33,684 33,484 34,031 34,758 36,145 38,939 42,532
Other services......... 9,382 8,822 8,587 8,173 8,747 8,506 4,460 8,257 8,388 10,544
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Total revenue........ 299,809 338,554 352,853 394,176 427,169 445,128 446,862 485,654 559,090 543,733
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Cost of goods sold:
Product.................. 226,040 262,745 275,011 310,083 339,883 352,433 354,876 383,212 441,593 416,616
Services:
Professional
services............. 3,604 4,018 5,124 5,985 5,956 7,223 10,161 11,774 13,281 15,327
Life cycle services.... 18,754 18,933 18,425 20,029 21,061 21,940 21,683 24,603 24,454 27,984
Other services......... 1,625 1,592 1,549 1,337 1,374 1,180 1,252 1,275 1,640 2,525
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Total cost of goods
sold............... 250,023 287,288 300,109 337,434 368,274 382,776 387,972 420,864 480,968 462,452
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Gross margin............... 49,786 51,266 52,744 56,742 58,895 62,352 58,890 64,790 78,122 81,281
Selling, general and
administrative
expenses(1)............ 44,189 44,778 45,610 47,834 46,362 46,772 76,891 31,855 56,896 59,340
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss).... 5,597 6,488 7,134 8,908 12,533 15,580 (18,001) 32,935 21,226 21,941
Interest expense, net.... (5,568) (6,006) (7,006) (7,398) (7,273) (7,721) (8,557) (6,714) (5,729) (3,359)
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Income (loss) before income
taxes and distributions on
convertible preferred
securities of trust....... 29 482 128 1,510 5,260 7,859 (26,558) 26,221 15,497 18,582
Income tax benefit
(provision)............ (12) (197) (52) (620) (1,946) (2,908) 9,827 (9,700) (5,734) (6,875)
Distributions on
convertible preferred
securities of trust,
net of tax............. -- -- -- -- -- -- -- -- -- (629)
Gain on disposal of
discontinued
businesses............. -- -- -- -- -- -- 9,194 -- -- --
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss).......... $ 17 $ 285 $ 76 $ 890 $ 3,314 $ 4,951 $ (7,537) $ 16,519 $ 9,763 $ 11,078
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Earnings (loss) per
share:(2)
Continuing operations.... $ -- $ 0.01 $ -- $ 0.03 $ 0.10 $ 0.15 $ (0.53) $ 0.44 $ 0.23 $ 0.26
Discontinued
operations............. -- -- -- -- -- -- 0.29 -- -- --
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Total earnings (loss) per
share..................... -- $ 0.01 -- $ 0.03 $ 0.10 $ 0.15 $ (0.24) $ 0.44 $ 0.23 $ 0.26
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
------------------------------------------------------------------------------------------------------
JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31,
1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product.................. 83.9% 85.6% 85.9% 87.0% 87.6% 87.4% 87.5% 87.3% 87.7% 85.2%
Services:
Professional
services............. 2.1% 2.2% 2.4% 2.4% 2.5% 3.0% 3.7% 3.5% 3.9% 5.1%
Life cycle services.... 10.9% 9.6% 9.2% 8.5% 7.8% 7.6% 7.8% 7.4% 7.0% 7.8%
Other services......... 3.1% 2.6% 2.4% 2.1% 2.0% 1.9% 1.0% 1.7% 1.5% 1.9%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Total revenue........ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold:
Product.................. 75.4% 77.6% 77.9% 78.7% 79.6% 79.2% 79.4% 78.9% 79.0% 76.7%
Services:
Professional
services............. 1.2% 1.2% 1.5% 1.5% 1.4% 1.6% 2.3% 2.4% 2.4% 2.8%
Life cycle services.... 6.3% 5.6% 5.2% 5.1% 4.9% 4.9% 4.9% 5.1% 4.4% 5.1%
Other services......... 0.5% 0.5% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.5%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Total cost of goods
sold............... 83.4% 84.9% 85.1% 85.6% 86.2% 86.0% 86.8% 86.7% 86.0% 85.1%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Gross margin............... 16.6% 15.1% 14.9% 14.4% 13.8% 14.0% 13.2% 13.3% 14.0% 14.9%
Selling, general, and
administrative
expenses............... 14.7% 13.2% 12.9% 12.1% 10.9% 10.5% 17.2% 6.6% 10.2% 10.9%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Operating income (loss).... 1.9% 1.9% 2.0% 2.3% 2.9% 3.5% (4.0)% 6.8% 3.8% 4.0%
Interest expense, net.... (1.9)% (1.8)% (2.0)% (1.9)% (1.7)% (1.7)% (1.9)% (1.4)% (1.0)% (0.6)%
Income (loss) before income
taxes and distributions on
convertible preferred
securities of trust....... 0.0% 0.1% 0.0% 0.4% 1.2% 1.8% (5.9)% 5.4% 2.8% 3.4%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Income tax benefit
(provision)............ (0.0)% (0.1)% (0.0)% (0.2)% (0.5)% (0.7)% 2.2% (2.0)% (1.0)% (1.3)%
Distributions on
convertible preferred
securities of trust,
net of tax............. -- -- -- -- -- -- -- -- -- (0.1)%
Gain on disposal of
discontinued
businesses............. -- -- -- -- -- -- 2.1% -- -- -- %
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
Net income (loss).......... 0.0% 0.1% 0.0% 0.2% 0.8% 1.1% (1.7)% 3.4% 1.7% 2.0%
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
-------- -------- -------- --------- -------- -------- -------- --------- -------- --------
</TABLE>
- ------------------------------
(1) During the third quarter of fiscal year 1996, the Company recorded a $31.1
million provision against its extended credit due from Merisel FAB. In the
fourth quarter of fiscal year 1996, the Company reversed $15.6 million of
this provision.
(2) Earnings per share give effect to the conversion of all outstanding shares
of Preferred Stock and Class B Common Stock into Company Common Stock and
the exchange of all outstanding warrants for shares of Company Common Stock
in connection with the Company's IPO as if the conversion had occurred at
the later of the beginning of fiscal year 1995 or the issuance date.
Earnings per share are calculated based upon the weighted average number of
shares of Company Common Stock and dilutive Company Common Stock equivalents
outstanding in each quarter. Consequently, the sum of the quarterly earnings
per share does not necessarily equal the year-to-date earnings per share.
The Company's quarterly revenues and operating results have varied
significantly in the past and will likely continue to do so in the future.
Quarterly revenues and operating results may fluctuate as a result of the demand
for the Company's products and services, the introduction of new hardware and
software technologies offering improved features, the introduction of new
services by the Company and its competitors, changes in the level of operating
expenses, the timing of major service projects, inventory adjustments,
competitive conditions and economic conditions generally. In particular, the
Company's operating results are highly sensitive to changes in the mix of the
Company's product and service revenues, product margins and interest rates.
Further, the purchase of the Company's products and services generally involves
a significant commitment of capital, with the attendant delays frequently
associated with large capital expenditures and authorization procedures within
an organization. For these and other reasons, the Company's operating results
are subject to a number of significant risks over which the Company has little
24
<PAGE>
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 materially adversely
affect the Company. In addition, the general availability of certain products,
particularly state of the art computing and data communications products, is
occasionally restricted. While the Company has not experienced significant
product supply shortages, other than due to credit restrictions as described
above, any such product supply shortages in the future could have a material
adverse effect on the Company. Because revenues are recognized upon the shipment
of products to the customer, revenues from product sales in any quarter are
substantially dependent on orders shipped in any given quarter. The Company is
increasing its fixed operating expenses, including a significant increase
relating to additional personnel, based on anticipated revenue growth in its
professional services and life cycle services. The Company may be unable to
adjust spending sufficiently in a timely manner to compensate for any unexpected
revenue shortfall, which could adversely affect operating results. Accordingly,
the Company believes that period-to-period comparisons of its operating results
should not be relied upon as an indication of future performance. In addition,
the results of any quarterly period are not indicative of results to be expected
for a full fiscal year. It is possible that in certain future quarters, the
Company's operating results may be below the expectations of public market
analysts and investors. In such event, the price of Common Stock would likely be
materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
The Company has utilized its line of credit with IBMCC and its operating
profits as well as cash proceeds from the issuance of Company Common Stock and
the sale of its franchise business to fund its significant revenue growth and
working capital requirements, to make payments on its long-term debt and to
purchase capital equipment.
The Company currently has a $275 million line of credit under the Financing
Program Agreement with IBMCC. At October 31, 1996, the Company had $245.7
million outstanding under this facility (at which time the facility provided
$300 million in available credit) of which $130.1 million is included in
accounts payable and $115.6 million is classified as short-term borrowings.
Borrowings under the line of credit are subject to certain borrowing base
limitations and are secured by portions of the Company's inventory, accounts
receivable and certain other assets. The line of credit currently has a term
expiring October 31, 1997 and is renewable thereafter for successive six-month
periods. IBMCC may terminate the line of credit at any time upon 90 days' notice
to the Company. In the event of such termination, the outstanding borrowings
under the Financing Program Agreement mature at the end of the term of the line
of credit. As of October 31, 1996 amounts borrowed under the line of credit bear
interest at prime minus 0.50%.
As a result of improved profitability and decreases in accounts receivable,
partially offset by increases in inventory levels and decreases in accounts
payable, the Company's operating activities provided cash of $15.4 million for
the six months ended October 31, 1996. The decrease in receivables is primarily
the result of payments received on the Company's accounts receivable from
Merisel FAB. The decrease in accounts payable is a result of significant early
pay vendor discounts taken October 1996.
During the six months ended October 31, 1996, the Company used cash of $35.6
million (net of cash acquired) to purchase the Dataflex Regions and $173.6
million to repay amounts borrowed under its Financing Program Agreement with
IBMCC. During this period, the Company also used cash of $7.2 million for
capital expenditures and plans to make additional significant investments in its
automated systems and its capital equipment throughout the remainder of fiscal
year 1997.
In January 1994, the Company sold certain assets and liabilities of its U.S.
franchise business to Merisel FAB for $80.2 million in cash plus additional
contingent consideration. In February 1996, the
25
<PAGE>
Company received an additional $14.6 million from the sale in settlement of the
contingent consideration. Pursuant to its distribution and services agreement,
the Company continues to supply product to Merisel FAB for which it earns a
monthly distribution fee. Approximately 40% of the Company's inventory shipments
by dollar volume are made to fulfill the Company's obligations under the
distribution services agreement. Pursuant to such agreement, Merisel FAB is
obligated to pay the Company for its daily purchases within two business days.
In March 1996, the Company completed its IPO selling 9,215,770 shares of
Company Common Stock and raising $83.4 million after selling expenses and
underwriting discounts and commissions. The Company used the proceeds of the
offering primarily to repay amounts borrowed under the line of credit with
IBMCC.
Effective May 24, 1996, the Company acquired substantially all of the assets
and liabilities previously associated with the business operations of Dataflex
Corporation known as the Dataflex Western and Southwest Regions. The Company
paid $37.0 million against an estimated purchase price of $42.0 million. The
purchase price is subject to certain post-closing adjustments. In addition, the
Company has recently consummated certain other acquisitions, including the
Transactions. See "Recent Developments." Management of the Company intends to
actively pursue the acquisition of other companies that sell products and
services that either complement or are expected to expand its existing business.
One or more of such acquisitions could require a substantial cash investment by
the Company. See "Risk Factors-- Acquisitions."
During October 1996, the Company and the Trust consummated the offering of
4,025,000 Trust Preferred Securities representing preferred undivided beneficial
interest in the assets of the Trust to the Initial Purchasers (as herein
defined) who then immediately sold such Trust Preferred Securities in
transactions exempt or excluded from registration under the Securities Act. The
aggregate net proceeds to the Company from the offering of the Trust Preferred
Securities totaled $194.5 million after selling expenses, discounts and
commissions. The Company used all of the proceeds to reduce its outstanding
indebtedness to IBMCC. See "Recent Developments."
Effective December 20, 1996, the Company consummated a revolving funding
trade receivables securitization facility (the "Securitization Facility") which
provides the Company with up to $175 million in available credit. See "Recent
Developments." Immediately after establishing the Securitization Facility, the
Company obtained $130.5 million in proceeds therefrom of which $105.5 million
was used to repay a portion of the IBMCC indebtedness. The remaining
availability under the Securitization Facility is intended to be used for
general corporate purposes and for potential future acquisitions of, or
investments in, one or more businesses of the Company.
The Company believes that cash generated from operations and the
Securitization Facility, together with its existing credit facilities, will be
sufficient to meet its cash requirements through at least the end of fiscal
1998.
26
<PAGE>
BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS." SEE "SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995."
The Company is a leading provider of services and products designed to build
and manage PC network infrastructures primarily for Fortune 1000 companies and
other large enterprises. The Company provides customized, integrated solutions
for its customers' distributed computing networks by combining a comprehensive
offering of value-added services with its expertise in sourcing and distributing
PCs, network products, computer peripherals and software from a variety of
vendors. These integrated solutions are designed to support the customer's
client/server environments throughout its life cycle. The Company refers to
these solutions as "Life Cycle Management." Life Cycle Management integrates the
offerings of design and consulting, acquisition and deployment, operation and
support, and enhancement and migration.
The Company believes that its customers require increasingly sophisticated
PC network systems and support infrastructures. The Company seeks to satisfy
these requirements while seeking to minimize its customers' internal staff
requirements and systems development risk. The Company enhances the delivery of
its services and products with automated systems, such as the Vanstar Navigator,
and process methodologies, such as Horizon, to analyze, design and manage its
customers' PC network infrastructures better. The Company's goal is to reduce
the labor component of the management of the life cycle of the PCs and related
network systems and thereby increase efficiency, reduce costs and make systems
more reliable and easier to use for every customer.
INDUSTRY
Large organizations are becoming increasingly dependent on information
technology to compete effectively in today's global markets. Organizations are
re-engineering their businesses and are using microcomputer-based network
technology to enhance productivity. Distributed network solutions provide
dramatic computing performance relative to their price. PC networks increase
speed and flexibility and provide improved functionality to end users. Achieving
the optimal automation solution, however, is challenged by the complexity of the
distributed network environment and the lack of trained resources to design,
deploy and support networks.
The decision-making process that organizations face when planning, selecting
and implementing information technology solutions is growing more complex.
Organizations must select from numerous product options with shortening life
cycles. Networks are typically comprised of PCs, peripherals, communications
devices and software. Large enterprises must continually integrate the diverse
PC environments that have been developed internally. Enterprises must design new
networks, and upgrade and migrate to new systems. Although PC networks enhance
business productivity, they typically present complex management problems and
increased administrative costs. According to The Gartner Group, a leading
information technology research firm, the total cost of ownership of a PC over
five years may be as much as five times the initial capital expense. In
addition, the shortage of qualified information technology personnel limits many
organizations' ability to capitalize on the latest technologies. These
organizations find it increasingly difficult and costly to maintain the internal
infrastructure needed to support their networks. Since many businesses do not
consider the internal management of their technology infrastructure to be a core
business activity, companies increasingly seek to outsource the management and
support of their PC network infrastructure.
The Company believes that no other company in the marketplace today offers
customers a sufficient range of integrated PC network solutions. Many service
providers, including systems integrators, consulting firms and those emerging
from the traditional mainframe environment, offer limited services, lack the
27
<PAGE>
capacity to support large widespread enterprises, or focus primarily on
non-infrastructure services. Value-added resellers typically have a regional
focus or do not offer a broad line of products and services. They often are too
small to service the complex network requirements of the large multi-site
customer.
The Company believes that the key criteria which businesses consider when
evaluating PC network integration service providers include the provider's
ability: (i) to deliver one integrated solution spanning the PC network's life
cycle; (ii) to supply multi-vendor network products customized to specific
end-user demands; and (iii) to provide services on a national and international
basis.
THE VANSTAR SOLUTION
The Company's product and service offerings span the life cycle of the PC
network infrastructure. The Company provides customized, integrated solutions
for the network infrastructure needs of its customers by combining a
comprehensive offering of value-added services with its expertise in sourcing
and distributing products from a variety of vendors. The Company believes that a
single source solution enables customers to use fewer vendors, and provides
tighter integration, lower costs, fewer errors, and greater management control.
The Company has built substantial resource depth in all service areas and offers
its integrated services on a nationwide basis.
The Company believes that its customers are demanding increasingly
sophisticated PC network systems and support infrastructures. The Company seeks
to satisfy these requirements while minimizing its customers' internal staff
requirements and systems development risk. The Company enhances the delivery of
its services and products with automated systems that utilize open architecture
and are expandable. The Company believes that significant efficiency can be
gained by capturing data at the point of origin and controlling that data
throughout the life cycle. The Company also uses automation to give its
customers greater control over order management and provision of services. The
Company's automated systems permit direct links between the customer and the
Company, which the Company believes results in more efficient and faster
delivery of products and services at a lower overall cost. For example, the
Vanstar Navigator provides an easy-to-use customer interface for self-service
order management. The Vanstar Navigator connects to the Vanstar Cockpit, which
provides the Company's customer service representatives with real-time product
availability, pricing and customer-specific account information. Another example
is the Company's NOVA system, a service delivery system developed by the Company
for the management of many of the Company's services: systems engineering, help
desk, dispatch, repair, installation, moves/adds/changes and asset management.
NOVA is designed to reduce costs, to improve billing procedures to capture
additional revenue, and to improve resource utilization in delivering the
Company's support services. The Company expects to fully implement NOVA during
the fourth quarter of fiscal 1997. The Company believes that its automated
systems significantly enhance its ability to satisfy its customers' needs.
STRATEGY
The Company's objective is to continue to be a leading provider of a
complete range of PC network infrastructure products and services to large
businesses throughout the world. The Company now offers a full array of services
including design and consulting, acquisition and deployment, operation and
support, and enhancement and migration. To achieve its objective, the Company
believes it must:
LEVERAGE ITS BROAD CUSTOMER BASE
The Company has approximately 300 current customers who purchased products
and services totaling at least $1 million during fiscal year 1996. Preserving
and enhancing its relationship with these customers is the Company's first
priority. In support of this effort, the Company recently brought its Starbase
Account Management system on-line. Starbase is an extensive database of customer
information that can be
28
<PAGE>
integrated with external data to pinpoint opportunities for application of the
Company's Life Cycle Management program.
DEVELOP AND ENHANCE VALUE-ADDED SERVICES
The Company believes that opportunities exist to increase its operating
margins by increasing the range of value-added services that it currently offers
its customers. The market for outsourced PC network services is expected to grow
at a compound annual rate of approximately 14%. These services are typically
sold at higher margins than more traditional services, such as product
procurement or repair and maintenance. The Company has developed expertise and
solutions in a number of value-added market segments, and will continue to
develop new services using its Horizon development methodology. The Company also
works with its suppliers, many of which provide leading technologies, to develop
new services. For example, the Company provides services to integrate Microsoft
Windows NT and Microsoft BackOffice into the Company's customers' environments.
The Company believes its relationship with Microsoft enhances its knowledge base
and expertise. The Company continually evaluates and pursues opportunities to
acquire technology and other resources that will enhance and extend the reach of
its value-added service offerings. The Company believes numerous opportunities
will exist in the future to acquire service providers who complement its
existing network services business.
EXPAND ITS WORLDWIDE SERVICE CAPABILITIES
The Company believes that in addition to being in all major United States
markets, it must also expand its global offerings. To expand its global
presence, the Company is implementing a program that overlays the Company's
systems and processes onto the service delivery and product distribution
capabilities of Groupe Bull, a European-based global computer and computer
services company, and Ingram Micro, an international computer products
distributor. This integrated program will provide to the Company's U.S.-based
multinational customers a common management interface covering the Company
performed services in the United States or services from the Company or its
alliance partners in other countries.
MAINTAIN A FOCUSED ACQUISITION STRATEGY
In order to maintain its position as a leading provider of PC network
infrastructure solutions to large businesses, the Company believes that
expansion through acquisitions, as well as internal growth, will be necessary.
Accordingly, the Company has consummated and expects to continue to pursue the
acquisition of companies that sell products and services that either complement
or expand its existing business. See "Risk Factors--Acquisitions" and "Recent
Developments."
PRODUCTS AND SERVICES
The Company combines a full suite of products and services to deliver
custom, integrated solutions for the PC network infrastructure requirements of
its customers. The Company combines value-added services with its expertise in
sourcing and distributing products from a variety of vendors to provide network
integration solutions. These integrated Life Cycle Management solutions are
designed to support the PC network infrastructure throughout its life cycle.
Life Cycle Management integrates the offering of design and consulting,
acquisition and deployment, operation and support, and enhancement and
migration. The Company offers each service as a discrete service or as part of
an integrated Life Cycle Management program. The Company believes that proper
planning and management are essential to providing quality service and to
attaining customer satisfaction. Through planning and management, the Company
seeks to optimize solutions at any point in the PC network life cycle.
29
<PAGE>
DESIGN AND CONSULTING SERVICES
The Company offers network design and consulting services that address the
PC network life cycle. For network design, the Company uses a five-step
methodology to assist customers in selecting, designing, planning and executing
a network project: discovery, current state definition, requirements definition,
solution design, and implementation planning. The Company employs national
consulting teams, such as its Enterprise Communications Consulting Group, which
provides expertise in cabling systems design, hubbing architecture,
bridging/routing/switching systems, wide area transport and network management.
Other teams have expertise in process-mapping and re-engineering for outsourcing
PC life cycle manage-
ment, asset management and disaster recovery planning.
ACQUISITION AND DEPLOYMENT SERVICES
The Company's network deployment services include product procurement,
configuration, distribution, installation, cabling and connectivity.
The Company sources PCs, servers, network products, computer peripherals and
software to equip the network environment. The Company provides products from
over 1,000 vendors, including Compaq Computer Corporation, International
Business Machines Corporation ("IBM"), Hewlett-Packard Company, Apple Computer,
Inc., Sun Microsystems, Inc., Microsoft Corporation, Novell, Inc., Lotus
Development, Cisco Systems, 3Com Corporation and Bay Networks, Inc. The Company
is authorized to sell a wide variety of network products, including servers,
desktop and mobile systems, bridges, routers, hubs and concentrators, operating
systems, applications, groupware and electronic mail products. The Company
provides a single point of contact for customers to place and track all product
orders. The Company's customer support groups in Indianapolis, Indiana and
Pleasanton, California provide complete order management services from quotation
to order processing, order tracking and fulfillment.
The Company has centralized its configuration and distribution facilities in
two highly-automated distribution centers located in Indianapolis, Indiana and
Livermore, California. The distribution facilities handle product receiving,
warehousing, central configuration, testing, order handling and shipping. The
Company ensures timely and reliable network equipment integration by providing
and coordinating a number of deployment services such as set-up, installation,
cabling, server connection and testing.
OPERATION AND SUPPORT SERVICES
The Company offers a variety of network operation and support services,
including moves, adds and changes, repair and maintenance, help desk and network
monitoring and asset management. With the acquisition of CDS, the Company has
expanded its offering of outsourcing services to clients.
The Company installs additional hardware and software to increase the
capacity of, or otherwise upgrade, existing products and systems. Generally,
moves, adds and changes assist customers in avoiding the costs associated with
acquiring new systems.
The Company offers repair and maintenance services, including extended
warranty service, depot repair and preventive maintenance. These services are
designed to minimize product failures and to extend the useful life of
equipment. On all products for which the Company is authorized to provide
warranty coverage, the Company offers its customers extended warranty service on
standard manufacturer configurations and optional components, up to 24 hours per
day, 365 days per year, anywhere in the United States within 100 miles of any of
the Company's approximately 100 service locations.
The Company offers help desk support through its Field Sales and Service
Operations Center located in Roswell, Georgia. Help desk support is available
for all major software applications and operating systems, including network
software. Help desk support can also troubleshoot problems for all major
hardware products. Customers access the help desk via a toll-free number.
Support is available up to 24 hours per day, 7 days per week. The Company's help
desk support group utilizes a call management system
30
<PAGE>
to track customer calls, to provide help desk with professionals on-line access
to support standards, and to maintain a technical support database. The
Company's help desk offerings can be delivered either from its Service
Operations Center or from an on-site facility established at a customer's
location. The Company also provides remote LAN monitoring and administration
services.
The Company provides asset management services. The Company's asset
management system captures and maintains detailed information about a customer's
installed base of PC hardware and software assets, and about all subsequent
service events related to those assets. It generates reports and schedules
through an end-user interface. The Company can provide a detailed analysis of
the installed base for use in managing asset costs.
ENHANCEMENT AND MIGRATION SERVICES
The Company offers enhancement and migration services to optimize the use of
information technology by its customers and reduce the cost and disruption of
changing technology platforms. The Company's tools and methods can migrate the
customer to new hardware and software platforms. These comprehensive tool kits
detail the full life cycle processes and procedures for planning and
implementing a migration project. Two of the Company's programs help customers
migrate to Windows 95 and Windows NT.
EDUCATION SERVICES
The Company's training and education services include a nationwide offering
of instructor-led and computer-based, self-paced training ("CBT") at both the
introductory and more advanced levels, and covering operating systems,
networking, electronic mail and personal productivity software. Through mobile
classrooms and a combination of CBT training with phone-based instructor
support, the Company can optimize delivery of education. The Company is a
Microsoft Authorized Technical Education Center, providing training for
Microsoft Windows 95, Windows NT, and BackOffice. Effective September 4, 1996,
the Company consummated the acquisition of the Mentor Partnership. Management of
the Company anticipates that this acquisition will strengthen the Company's
ability to offer training and education services in Ohio and throughout the
upper midwestern United States.
AUTOMATED SYSTEMS, PROCESS METHODOLOGIES AND TECHNICAL PERSONNEL
The Company enhances its service delivery with customized automated systems
which utilize open architecture and enable the Company's customers to change the
processes they use to manage their PC network support infrastructures, thereby
reducing cost and managing complexity. The Company believes efficiency can be
gained by capturing data at its point of origin and managing that data
throughout the life cycle. The Company believes that full life cycle automation
increases efficiency and reduces touch costs. Process methodologies allow the
Company to analyze, design and manage the PC network environment better. In
addition to the Company's systems and methodologies, the Company believes that
expert technical and consulting personnel are fundamental to its ability to
deliver complete network life cycle solutions.
AUTOMATED SYSTEMS
The Company has invested significant resources to automate its internal
service delivery systems and developing electronic links between the Company's
systems and its customers' systems. The Company believes that these systems
reduce costs, enhance service quality and improve reporting. The automated
systems include the Vanstar Navigator, Cockpit, DCMS, FLEX and Tracker, and
NOVA. The Company uses electronic links, including Electronic Data Interchange,
to connect to customers' systems.
THE VANSTAR NAVIGATOR. The Vanstar Navigator is an order management system
designed to give customers access to information about products available from
the Company. The Vanstar Navigator can
31
<PAGE>
be installed on either a single PC or in a multi-user environment at the
customer's site. The Vanstar Navigator provides customers with detailed
information on product pricing and availability, and can generate quotes,
purchase orders, order status, invoice history, on-line help and toll-free
telephone support. With the Vanstar Navigator, customers can place and track
orders themselves.
COCKPIT. The Company's customer service representatives use the Company's
order management system, called Cockpit, to generate quotes and to enter and
track product orders. Cockpit provides real-time product availability and
pricing information, and maintains detailed, customer-specific account
information, including account history, standard product configurations, special
pricing, locations, authorized purchasing personnel and credit limits.
DCMS, FLEX AND TRACKER. The Company's Distribution Center Management System
("DCMS") and its FLEX systems operate the Company's automated distribution and
configuration centers located in Indianapolis, Indiana, and Livermore,
California. DCMS and FLEX manage the flow of orders through the distribution
process and provide the on-line information necessary to configure systems to
customers' standards. Operating on a LAN, DCMS assigns a unique barcode
fingerprint to each SKU as it arrives. Warehouse staff use radio frequency,
hand-held devices to manage and track the movement of product orders through the
centers. The Company's Tracker system tracks each package from the warehouse to
the customer site. The Company's distribution centers are colocated with Federal
Express depots. The Company's systems are integrated with Federal Express'
systems, providing complete point-to-point delivery and tracking.
NOVA. The Company has developed NOVA, a service delivery system for the
management of its systems engineering, help desk, dispatch, repair,
installation, moves/add/changes and asset management service offerings. The
Company expects to fully implement NOVA during the fourth quarter of fiscal
1997. NOVA's resource allocation system is designed to ensure that the
appropriate technical personnel are available to respond to customer service
calls. Service calls placed by customers are received through the Company's
First Touch program. NOVA automatically determines which field engineer is
available and sends all relevant customer information to the field engineer
through a field computing device via radio. NOVA is backed by more than 50
strategic parts stocking locations in the United States; spare parts can be
delivered the same day or shipped overnight to either the customer location or
the field service engineer. The Company believes that NOVA will result in
increased customer network uptime, more accurate matching of parts and field
service engineer skills to service needs, more accurate and comprehensive
information management, and lower costs.
ELECTRONIC LINKS. In order to create a cooperative service environment, the
Company uses electronic links to connect its systems to its customers' systems
through Electronic Data Interchange, the Internet or through private Wide Area
Networks.
PROCESS METHODOLOGIES
The Company believes that the complex and sometimes unpredictable technical
environment and the customization required by customers contribute to the
variability of service delivery requirements. To manage this complexity, the
Company uses several methods for capturing, codifying and disseminating
organizational knowledge to individuals in the field. Using Horizon, its
professional service development process, the Company has developed a series of
tool kits to provide standards and solutions for common network problems plus
tools for solving unique problems. Lotus Notes is the primary vehicle used by
the Company for electronic delivery of systematized procedures and processes.
The Company also employs flexible process-mapping, just-in-time training and
knowledge-based management techniques.
TECHNICAL PERSONNEL
The Company employs over 3,900 technical professionals in the United States.
The Company expanded its systems engineering force from approximately 200 in
March 1994 to approximately 1,400 in
32
<PAGE>
December 1996. The technical personnel are both client dedicated and centrally
dispatched, and provide service either on a contract basis or a project basis.
The Company is also developing groups of technical professionals who specialize
in the areas of operations, methods and practices, process management and
consulting. The Company's engineering staff is certified in the major network
operating systems and has experience with LAN and WAN networking products and
protocols. The Company supports major network operating systems, including
Microsoft Windows NT and BackOffice, Novell NetWare, IBM LAN Server and
AppleShare. In May 1995, the Company entered into an agreement with Microsoft
Corporation pursuant to which the Company hired a substantial number of systems
engineers to support Microsoft's BackOffice and Windows NT networking products.
CUSTOMERS
The Company's broad customer base of primarily Fortune 1000 companies and
other large enterprises includes, among others, the following, all of which
purchased products and services in excess of $1.0 million during the fiscal year
ended April 30, 1996 from the Company:
<TABLE>
<CAPTION>
CUSTOMER NAME INDUSTRY
- ----------------------------------------------------------- ---------------------------------
<S> <C>
Aluminum Company of America Manufacturing
American Greetings Corporation Manufacturing
Autodesk Inc. Software
BellSouth Corporation Telecommunications
Charles Schwab and Company Inc. Financial Services
Cigna Corporation Insurance
Duke Power Company Utility
Federal Express Corporation Transportation
Florida Power & Light Company Utility
Ford Motor Company Manufacturing
Hoechst Celanese Corporation Chemicals
Hoffmann-La Roche Inc. Pharmaceuticals
Integrated Systems Solutions Corporation Computer Services
International Business Machines Corporation Computers
International Paper Company Forest Products
Lehman Brothers Inc. Financial Services
Liberty Mutual Insurance Group Insurance
Lotus Development Corporation Software
MIC Communications Corporation Telecommunications
Microsoft Corporation Software
Mobil Oil Corporation Oil/Gas
Motorola Inc. High Technology
Owens-Corning Fiberglass Corporation Manufacturing
Phoenix Newspapers Inc. Publishing
Praxair Inc. Manufacturing
Sedgwick James Inc. Insurance
Signet Banking Corp. Financial Services
Sony Music Entertainment Inc. Entertainment
State of New Jersey State Government
Sybase Inc. Software
The Equitable Companies Inc. Insurance
United Technologies Corporation Aerospace and Manufacturing
UNUM Corporation Insurance
</TABLE>
33
<PAGE>
During the fiscal years ended April 30, 1995 and 1996 and during the fiscal
quarter ended October 31, 1996, Microsoft Corporation accounted for 10.8%, 12.0%
and 12.6% of the Company's total revenues, respectively.
MARKETING AND SALES
The Company markets its PC network Life Cycle Management services by
targeting executives of large enterprises who have information technology
decision-making authority. As of December 31, 1996, the Company's domestic sales
network consisted of over 800 field sales and service representatives. The
Company's direct sales force is comprised of account managers and technical
sales personnel. The Company's account manager force is responsible for
prospecting new business, maintaining and expanding relationships with current
customers, and ensuring customer satisfaction. Technical sales personnel provide
the technical expertise to support and supplement the sales effort. To improve
sales productivity, the Company equips its sales organization with sales force
automation tools that provide them with a complete suite of marketing and
account management tools. These tools reduce the sales representatives' physical
dependence on the branch offices, allowing the Company to operate a virtual
office environment while sharing information across multiple departments.
COMPETITION
The markets in which the Company operates are characterized by intense
competition from several types of technical service providers, including
mainframe and mid-range computer manufacturers and outsourcers entering the
personal computer services marketplace. These include Digital Equipment
Corporation Multi-Vendor Services, Electronic Data Systems Corporation,
Hewlett-Packard Company Multi-Vendor Services and Integrated Systems Solution
Corporation. Other competitors include VARs, systems integrators and third-party
service companies, such as AmeriData Technologies, Inc., CompuCom Systems, Inc.,
DecisionOne, Entex Information Services, InaCom Corp., MicroAge, Inc. and TSS.
The Company expects to face further competition from new market entrants and
possible alliances between competitors in the future. Certain of the Company's
current and potential competitors have greater financial, technical, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the development, promotion and
sales of their services than the Company.
LEGAL PROCEEDINGS
Various legal actions arising in the normal course of business have been
brought against the Company and certain of its subsidiaries. Management believes
that the ultimate resolution of these actions will not have a material adverse
effect on the Company's financial position or results of operations, taken as a
whole.
EMPLOYEES
As of December 31, 1996, the Company had approximately 5,600 employees. The
Company has never experienced a work stoppage and its employees are not covered
by a collective bargaining agreement. The Company believes that its relations
with its employees are good.
PROPERTIES
The Company leases approximately 134,475 square feet of office space for its
headquarters in Pleasanton, California, under a lease expiring in January 1998.
The Company has signed an agreement to extend the lease for 89,000 of the
134,475 square feet until 2006. In June 1996, the Company sold its approximately
180,000 square foot distribution center in Indianapolis, Indiana. Following the
sale of the facility, the Company leased back the premises through April 1997
for use during the construction of a
34
<PAGE>
new, approximately 400,000 square foot build-to-specification distribution
center in Indianapolis, Indiana with occupancy targeted for May 1997. The lease
on the new facility will expire in April 2007. In June 1996, the Company reduced
the amount of space leased in its additional and separate warehouse facility in
Indianapolis, Indiana from 129,000 square feet to approximately 64,000 square
feet and extended the lease on the property through February 2007. In addition,
the Company leases an approximately 192,000 square foot distribution center and
an approximately 29,000 square foot return center in Livermore, California, an
approximately 52,000 square foot repair facility in Wharton, New Jersey, and
approximately 137,000 square feet of office space in the Roswell and Atlanta
areas of Georgia. The lease for the Livermore, California, distribution center
expires in September 1999; 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 the Roswell, Georgia, premises expires in May
1998. The Company leases other properties that it does not consider material to
its operations. The Company believes that its facilities are suitable and
adequate for its present operations.
35
<PAGE>
RECENT DEVELOPMENTS
ACQUISITION OF DATAFLEX REGIONS
Effective May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Dataflex and of Datalfex's wholly-owned subsidiary, Dataflex Southwest
Corporation. The assets acquired and liabilities assumed comprise substantially
all of the assets and liabilities previously associated with the business
operations of Dataflex known as the Dataflex Western Region and Dataflex
Southwest Region. The two Dataflex Regions offer PC product distribution,
service and support in the states of Arizona, California, Colorado, Nevada, New
Mexico, and Utah and reported revenues of approximately $145 million for the
fiscal year ended March 31, 1996. The purchase price of the assets and
businesses acquired from Dataflex was approximately $42.0 million, subject to
certain post-closing adjustments. Of this amount, the Company paid approximately
$37.0 million in cash on May 29, 1996, with the remainder due following the
completion of an audit of the assets acquired and the liabilities assumed as of
May 31, 1996 and the completion of certain other post-closing matters.
AGREEMENT WITH DONALDSON, LUFKIN & JENRETTE FOR PAYMENT AGAINST MERISEL
RECEIVABLES
On May 24, 1996, the Company and Donaldson, Lufkin & Jenrette Securities
Corporation entered into an agreement pursuant to which the Company received
$15.6 million in exchange for providing Donaldson, Lufkin & Jenrette Securities
Corporation the right to receive an aggregate of $20 million in payments during
May, June and July of 1997 out of the amounts collected from receivables owed to
the Company by Merisel FAB under the distribution and services agreements dated
as of January 31, 1994, as amended, between the Company and Merisel. The Company
will continue to receive the related interest income from the Merisel
receivables.
ACQUISITION OF MENTOR TECHNOLOGIES, INC.
Effective September 4, 1996, the Company consummated the acquisition of the
Mentor Partnership by merging (the "Mentor Merger") each of Mentor Technologies,
Inc., an Ohio corporation and the sole general partner of the Mentor Partnership
("Mentor"), and Cybernetics Tutor, Inc., an Ohio corporation and sole limited
partner of the Mentor Partnership ("Cybernetics"), with and into VST Midwest,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company. A total
of 300,000 shares of Company Common Stock (having an aggregate value on the
closing date of approximately $6.04 million) were issued in connection with the
Mentor Merger. Of these shares 27,000 shares of Company Common Stock will be
held in escrow until March 3, 1997 to satisfy certain indemnification
obligations of Mentor, Cybernetics and the Mentor Partnership. Any shares of
Company Common Stock remaining at the termination of the escrow will be
distributed pursuant to the terms of the merger agreement executed in connection
with the Mentor Merger. The Mentor Partnership designs, develops and implements
instructional programs to educate and familiarize individuals and corporations
with computers and computer software. Management of the Company anticipates that
this acquisition will strengthen the Company's ability to offer training and
education services in Ohio and throughout the upper midwestern United States.
For the calendar year ended December 31, 1995, the Mentor Partnership had
revenues of approximately $5.5 million.
THE TRUST OFFERING
During October 1996, the Trust, a statutory business trust formed under the
laws of the State of Delaware by the Company as sponsor, issued 4,025,000 Trust
Preferred Securities representing preferred undivided beneficial interests in
the Trust. The Trust Preferred Securities were originally sold by Robertson,
Stephens & Company LLC, Alex. Brown & Sons Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation and The Robinson-Humphrey Company, Inc.
(collectively, the "Initial Purchasers") in transactions exempt from the
registration requirements of the Securities Act, to persons believed by
36
<PAGE>
such Initial Purchasers to be "qualified institutional buyers" (as defined in
Rule 144A of the Securities Act), to "institutional accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) or outside
the United States to non-U.S. persons in off-shore transactions in reliance on
Regulation S promulgated under the Securities Act. The Company owns all of the
common securities representing undivided beneficial interests in the Trust (the
"Trust Common Securities"). The Trust was established for the specific purpose
of issuing the Trust Preferred Securities and the Trust Common Securities and
investing the gross proceeds derived therefrom in an equivalent principal amount
of the Convertible Debentures issued by the Company. This offering of Trust
Preferred Securities and Trust Common Securities and the related issuance of
Convertible Debentures (the "Trust Offering") resulted in aggregate proceeds to
the Company of $194.5 million (net of Initial Purchasers' discounts and
estimated offering expenses of $6.7 million) which were used by the Company to
reduce its outstanding indebtedness to IBMCC under the Financing Program
Agreement. Upon an event of default under the Amended and Restated Declaration
of Trust dated as of October 2, 1996 among the trustees named therein and the
Company as sponsor (the "Declaration"), the holders of Trust Preferred
Securities will have a preference over the Company as the holder of the Trust
Common Securities with respect to payments in respect of distributions and
payments upon redemption, liquidation and otherwise.
Holders of the Trust Preferred Securities are entitled to receive cumulative
cash distributions at an annual rate of 6 3/4% of the liquidation amount of $50
per Trust Preferred Security, accruing from October 2, 1996, and payable
quarterly in arrears on each January 1, April 1, July 1 and October 1. The
payment of distributions out of moneys held by the Trust and payments on
liquidation of the Trust or the redemption of Trust Preferred Securities, as
described below, are guaranteed by the Company (the "Guarantee") to the extent
the Trust has funds available therefor. The Guarantee, when taken together with
the Company's obligations under the Indenture dated October 2, 1996 between the
Company as issuer and Wilmington Trust Company as trustee (the "Indenture")
pursuant to which the Convertible Debentures were issued and its obligations
under the Declaration, including its obligations to pay costs, expenses, debts
and liabilities of the Trust, provides a full and unconditional guarantee of
amounts due on the Trust Preferred Securities. The Company's obligations under
the Guarantee rank senior to the Company Common Stock.
The Company has the right to defer payments of interest on the Convertible
Debentures at any time for up to 20 consecutive quarters (each, an "Extension
Period"), but not beyond the maturity of the Convertible Debentures (October 1,
2016). If interest payments are so deferred, distributions on the Trust
Preferred Securities also will be deferred. During any Extension Period,
distributions will continue to accrue with interest thereon (to the extent
permitted by applicable law) at a rate of 6 3/4% per annum compounded quarterly.
There could be multiple Extension Periods of varying lengths throughout the term
of the Convertible Debentures (but distributions would continue to accumulate
quarterly and accrue interest until the end of any such Extension Period). The
Company has agreed, among other things, not to declare or pay any dividend on
any class of its capital stock during any Extension Period, subject to the right
of the Company to pay dividends or distributions in shares of Company Common
Stock or on the Preferred Stock, and in certain other exceptions.
Generally, holders of the Trust Preferred Securities do not have any voting
rights. Each Trust Preferred Security is convertible at the option of the holder
into 1.739 shares of Company Common Stock (equivalent to a conversion price of
$28.75 per share of Company Common Stock), subject to adjustments in certain
circumstances. Accordingly, as of the date of this Prospectus, the Trust
Preferred Securities are convertible into an aggregate of 6,999,475 shares of
Company Common Stock.
The Convertible Debentures are redeemable by the Company, in whole or in
part, from time to time, on or after October 5, 1999 at specific redemption
prices ranging from 104.725% to 100.000% of the principal amount of the
Convertible Debentures. The Convertible Debentures may also be redeemed in
certain circumstances upon the occurrence of specified tax events arising from a
change in law or a change in legal interpretation regarding certain tax matters.
37
<PAGE>
Upon the liquidation, winding up or termination of the Trust, the holders of
the Trust Preferred Securities will be entitled to receive for each Trust
Preferred Security a liquidation amount of $50 plus accrued and unpaid
distributions thereon (including interest thereon) to the date of payment,
unless, in connection with such dissolution, Convertible Debentures are
distributed to the holders of the Trust Preferred Securities.
In connection with the Trust Offering, the Company and the Trust entered
into a registration rights agreement with the Initial Purchasers (the
"Registration Rights Agreement") pursuant to which the Company and the Trust
agreed to file a shelf registration stated on Form S-1 with the Commission for
the benefit of the holders of the Trust Preferred Securities (the "Trust Shelf
Registration Statement"). The Trust Shelf Registration Statement was declared
effective January 15, 1997 and subject to the Company's right in certain
circumstances to suspend the use thereof, is expected to be maintained as
effective until (i) the earlier of January 15, 2000, (ii) such date as all
securities registered thereunder have been disposed of or (iii) the date on
which the securities held by persons that are not affiliates of the Company or
the Trust may be resold without registration pursuant to Rule 144(k) under the
Securities Act. The Company has paid and will continue to pay substantially all
of the expenses incurred in connection with the Trust Shelf Registration
Statement (other than commissions, concessions or discounts to broker-dealers).
SECURITIZATION FACILITY
On December 26, 1996, but effective December 20, 1996, the Company
consummated the Securitization Facility with Pooled Accounts Receivable Capital
Corporation, a commercial paper conduit sponsored by the Bank of Montreal (the
"Pool"), which provides the Company with up to $175 million in available credit.
Immediately after establishing the Securitization Facility, the Company sold an
undivided interest in certain covered accounts receivables to the Pool resulting
in net proceeds to the Company of approximately $130.5 million, of which
approximately $105.5 million was used to repay a portion of the IBMCC
indebtedness. The remaining availability under the Securitization Facility is
intended to be used to provide working capital to the Company and for potential
future acquisitions of, or investments in, one or more businesses by the
Company. The Securitization Facility contemplates reinvestment by the Pool from
time to time in individual interests in additional Covered Accounts Receivable
of the Company, to the extent of proceeds received by the Pool with regard to
previously purchased interests. The Pool purchases the undivided interests in
Covered Accounts Receivable for a purchase price based upon, among other things,
prevailing market interest rates at the time of reinvestment. The Securitization
Facility completes the Company's refinancing plan that included the Trust
Offering.
THE TRANSACTIONS
For information regarding the Transactions, pursuant to which the Company is
hereby registering the Shares for resale, see "Selling Stockholders."
38
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of the date of this
Prospectus with respect to each person who is an executive officer or director
of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
William Y. Tauscher(1) 46 Chairman of the Board and Chief Executive Officer
Jeffrey S. Rubin(1)(4) 53 Vice Chairman of the Board and Chief Financial Officer
Jay S. Amato 37 President, Chief Operating Officer and Director
Richard N. Anderson 40 Senior Vice President and General Manager Life Cycle Services Group
H. Christopher Covington 47 Senior Vice President, General Counsel and Secretary
Robert C. Kuntzendorf 51 Senior Vice President Operations
Chris M. Laney 39 Senior Vice President Networking Services
Ahmad Manshouri 56 Senior Vice President and General Manager Product Operations
Michael J. Moore 45 Senior Vice President Management Information Services
Coleman D. Sisson 39 Senior Vice President and General Manager Learning Network
Thanos M. Triant 50 Senior Vice President and Chief Technology Officer
William R. Waas 49 Senior Vice President Service
John W. Amerman(3) 65 Director
Richard H. Bard(1)(3) 49 Director
Stephen W. Fillo(2) 59 Director
Stewart K.P. Gross(1) 37 Director
William H. Janeway(3)(4) 53 Director
John R. Oltman(2) 51 Director
John L. Vogelstein 62 Director
Josh S. Weston(4) 68 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation and Stock Option Committee.
(4) Member of the Finance Committee.
Jay S. Amato became President and Chief Operating Officer in July 1995 and a
director in December 1995. From January 1993 until July 1995, he was Senior Vice
President and President, North America Operations of the Company. From June 1991
until January 1993, he was Senior Vice President, Major Market Operations of the
Company, and from April 1989 until June 1991, he was Vice President of Business
Development of the Company. Mr. Amato was previously the New York regional
manager and director of operations of The Computer Factory, Inc.
John W. Amerman became a director in June 1996. He has served as Chairman
and Chief Executive Officer of Mattel, Inc., a leading toy manufacturer, since
1987. Prior to his chairmanship with Mattel, Inc., Mr. Amerman served as
President of Mattel International. Before joining Mattel in 1980, Mr. Amerman
39
<PAGE>
was President of the American Chicle division of Warner Lambert Corp., a
consumer health care products company. Mr. Amerman is also a member of the Board
of Directors of Unocal Corporation, a worldwide energy resources company, a
member of the Board of Governors of the Hugh O'Brian Youth Foundation and a
member of the Board of Overseers of Dartmouth's Amos Tuck School.
Richard N. Anderson became Senior Vice President in December 1993 and
General Manager Life Cycle Services Group in May 1996. He was Vice President,
Field Sales from October 1992 until December 1993. From July 1991 to October
1992, he was an Area Director for the Company, responsible for sales in the New
England area. From December 1983 until July 1991, he was a founder and Chief
Operating Officer of New England Computer Corporation, one of the largest
Company franchisees. Prior thereto, he was a Financial Systems Consultant for
Digital Equipment Corporation.
Richard H. Bard became a director of the Company in September 1987 and
served as Vice Chairman of the Board of Directors from July 1989 to December
1991. He has been a director and Chief Executive Officer of Optical Security
Group, Inc., a materials technology company, since September 1993, and became
President and Chairman of the Board of that company in April 1995. From July
1989 to December 1991, he served at different times in the capacities of
Director, Chairman, President and Chief Executive Officer of ComputerLand
International Development, Inc. Since 1991, he has also been Chief Executive
Officer of Bard & Co., Inc., a diversified investment management company. From
May 1986 until December 1988, he was Chairman and Chief Executive Officer of
CoastAmerica Corporation, a franchisor of hardware product stores. Prior to that
time, he was President and Chief Operating Officer of FoxMeyer Corporation,
which he co-founded in 1978. Mr. Bard is also a director of Builder Marts of
America Inc., a supplier of building materials, and Polymedica Industries, Inc.,
a manufacturer of health care products.
H. Christopher Covington became Senior Vice President, General Counsel and
Secretary in August 1994. From April 1993 until August 1994, he was Vice
President. From November 1990 until April 1993, he was Assistant General Counsel
and Assistant Secretary of the Company. From January 1988 until November 1990,
he was a partner of the law firm of Hardin, Cook, Loper, Engel & Bergez.
Stephen W. Fillo became a director in September 1987. He has been President
of Fillo & Co., Inc., an independent investment firm, since December 1990. He
was a Managing Director of E.M. Warburg, Pincus & Co., Inc., a venture banking
and investment counselling firm, from 1981 to 1990. He is a director of LCI
International Inc., a long distance telephone carrier.
Stewart K.P. Gross became a director in June 1994. Mr. Gross is a Managing
Director of E.M. Warburg, Pincus & Co., Inc. Mr. Gross has been with that firm
since July 1987 and has been a Managing Director since January 1993. He is a
director of OpenVision Technologies, Inc., a software company, and several
privately-held companies.
William H. Janeway became a director in June 1994. He has been a Managing
Director and the head of the Venture Capital High Technology Team since 1988 of
E.M. Warburg, Pincus & Co., Inc. Mr. Janeway is a director of Maxis, Inc., an
entertainment software company, Zilog, Inc., a semiconductor manufacturer,
OpenVision Technologies, Inc., a software company, and several private
companies.
Robert C. Kuntzendorf became Senior Vice President Operations in April 1990.
Before joining the Company, he served as Vice Chairman of FoxMeyer Corporation,
a wholesale pharmaceutical distributor and franchisor, which he joined in 1983.
Chris M. Laney became Senior Vice President Networking Services in July
1995. From July 1993 until July 1995, he was Vice President Networking Services.
From April 1992 until July 1993, he was Western Regional Director of Networking
Services. From October 1989 until April 1992, he was Director of Networking
Services for Dataphaz, Inc., a Company franchisee.
40
<PAGE>
Ahmad Manshouri became Senior Vice President and General Manager Product
Operations in July 1995. He was Senior Vice President, Purchasing and Vendor
Management from January 1993 until July 1995. From July 1992 until January 1993,
he was a Vice President of the Company. Prior thereto, he was the founder and
Vice President of Infomax, Inc., one of the largest Company franchisees.
Michael J. Moore became Senior Vice President Management Information
Services in January 1993. From May 1987 until January 1993, he was Vice
President Information Systems. Prior thereto, he was President and Chief
Executive Officer of The Software Place, a retailer of computer software.
John R. Oltman became a director of the Company in June 1996. Mr. Oltman is
the former Chairman and Chief Executive Officer of SHL Systemhouse, Inc., a
provider of client/server consulting, systems integration and technology
outsourcing. Before joining SHL Systemhouse, Mr. Oltman was Worldwide Managing
Partner for Integration Services for Andersen Consulting and a member of
Andersen's Worldwide Organization Board of Directors. Mr. Oltman joined the
Arthur Andersen Worldwide Organization in 1970 and held a number of positions
within that firm, including Managing Partner for Andersen's Chicago Consulting
Group. Mr. Oltman is a director of TSW International and IA Corporation,
application software companies.
Jeffrey S. Rubin became Vice Chairman in June 1995, Chief Financial Officer
in November 1995 and a director in July 1991. From May 1994 to February 1995,
Mr. Rubin was Senior Vice President, Business Development and Planning for GTE
Corporation. He was Executive Vice President and Chief Financial Officer of
NYNEX Corporation from 1993 until April 1994. From January 1991 to 1993, he was
Senior Vice President and Chief Financial Officer of NYNEX Corporation. From
March 1990 to January 1991, he was Vice President Finance of NYNEX Corporation.
Mr. Rubin is a director of Shared Medical Systems Corporation, a medical
financial services company.
Coleman D. Sisson became Senior Vice President and General Manager Learning
Network in July 1995. From 1992 until July 1995, he was Vice President, Customer
Services for Powersoft Corp., a software company, and from 1987 until 1992, he
was the Training and Customer Service Manager of Compaq Computer Corporation.
William Y. Tauscher became Chairman of the Board of the Company in September
1987 and Chief Executive Officer in September 1988. He was President from
September 1988 to July 1995. Prior to September 1988, he was Chairman of the
Board, President and Chief Executive Officer of FoxMeyer Corporation, a
wholesale pharmaceutical distributor and franchisor that he co-founded in 1978
and a subsidiary of National Intergroup, Inc., a diversified holding
corporation. He is a director of The Vons Companies, Inc., a grocery store
chain.
Thanos M. Triant became Senior Vice President and Chief Technology Officer
for the Company in November 1995. Prior to joining the Company, Mr. Triant was
Vice President of Information Systems for the Times Mirror Company from January
1994 to November 1995. From January 1990 to January 1994, he was the Director of
Systems Architecture for Sun Microsystems Inc.
John L. Vogelstein became a director in January 1991. He has been President
of E.M. Warburg, Pincus & Co., Inc. since 1994, Vice Chairman of E.M. Warburg,
Pincus & Co., Inc. since 1982, President of Warburg, Pincus Ventures, Inc. since
1980 and a Partner of Warburg, Pincus & Co. since 1971. Mr. Vogelstein is a
director of ADVO, Inc., a direct mail marketing company, Aegis Group plc, a
media buying company, LCI International, Inc., a long distance telephone
carrier, Mattel, Inc., a toy manufacturer, Value Health, Inc., a managed care
company, and several private companies.
William R. Waas became Senior Vice President Service in July 1995. From
January 1989 until July 1995, he was Vice President Service. Prior to joining
the Company, he was Vice President of Systems Support of Grumman Data Systems
Corporation, a computer services company. He is currently Chairman of CompTIA,
an industry association.
41
<PAGE>
Josh S. Weston became a director of the Company in June 1996. Mr. Weston has
served as Chairman and Chief Executive Officer of Automatic Data Processing,
Inc., a computer services company, since 1985. Mr. Weston is also a member of
the Board of Directors of Public Service Enterprise Group Inc., an electric and
gas utility company, Olsten Corp., a provider of home health care and temporary
staffing services and Shared Medical Systems, a provider of health information
services.
Executive officers serve at the discretion of the Board of Directors. All
directors serve on the Board of Directors of the Company until the next annual
meeting of stockholders of the Company and until their successors are elected
and qualified. Non-employee directors receive reimbursement of out-of-pocket
expenses for attendance at Board meetings. In addition, certain directors may
receive stock options under the Company's stock option plans. See "Management
Stock Option Plans."
The Board of Directors has established four committees. The Executive
Committee is comprised of Messrs. Tauscher, Rubin, Bard and Gross and generally
has all the powers of the Board of Directors, subject to limitations provided by
the DGCL. The Audit Committee is comprised of Messrs. Fillo and Oltman and
oversees the activities of the Company's independent auditors and reviews the
Company's internal accounting procedures and controls. The Compensation and
Stock Option Committee is comprised of Messrs. Amerman, Bard and Janeway and
makes recommendations to the Board of Directors with respect to general
compensation and benefit levels, determines the compensation and benefits for
the Company's executive officers and administers the Company's stock option
plans. The Finance Committee is comprised of Messrs. Rubin, Janeway and Weston
and, in general, advises the Board with regard to providing appropriate
financing for the Company's activities, including acquisitions.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation earned by its
Chief Executive Officer and the four other most highly compensated executive
officers of the Company (collectively, the Named Executive Officers) for
services rendered in all capacities to the Company during the fiscal years ended
April 30, 1995 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------
AWARDS
ANNUAL COMPENSATION ----------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS/SARS (#)
- -------------------------------------- --------- ----------- ----------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
William Y. Tauscher................... 1995 550,008 30,000 -- 325,000(1)
CHAIRMAN OF THE BOARD AND CHIEF 1996 550,008 550,008 -- 1,187,434(1)
EXECUTIVE OFFICER
Jay S. Amato.......................... 1995 256,245 25,000 -- 47,726(1)
PRESIDENT AND CHIEF OPERATING 1996 312,498 312,293 -- 300,000(1)
OFFICER
Jeffrey S. Rubin...................... 1995 -- -- -- 4,037(1)(5)
VICE CHAIRMAN OF THE BOARD AND CHIEF 1996 243,756 242,424 -- 250,000(1)(6)
FINANCIAL OFFICER
Ahmad Manshouri....................... 1995 204,006 20,000 -- 15,000(1)
SENIOR VICE PRESIDENT AND GENERAL 1996 242,834 194,142 -- 75,000(1)
MANAGER PRODUCT OPERATIONS
Richard N. Anderson................... 1995 182,508 20,000 1,940(7) 15,000(1)
SENIOR VICE PRESIDENT SALES 1996 219,168 175,258 -- 85,100(1)
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION ($)
- -------------------------------------- -----------------
<S> <C>
William Y. Tauscher................... 87,634(2)
CHAIRMAN OF THE BOARD AND CHIEF 1,566(3)
EXECUTIVE OFFICER
Jay S. Amato.......................... 1,014(3)
PRESIDENT AND CHIEF OPERATING 2,094(4)
OFFICER
Jeffrey S. Rubin......................
VICE CHAIRMAN OF THE BOARD AND CHIEF 1,944(3)
FINANCIAL OFFICER
Ahmad Manshouri....................... 768(3)
SENIOR VICE PRESIDENT AND GENERAL 3,921(3)
MANAGER PRODUCT OPERATIONS
Richard N. Anderson................... 1,669(8)
SENIOR VICE PRESIDENT SALES 2,105(9)
</TABLE>
- --------------------------
(1) These shares are subject to exercise under stock options granted under the
Company's stock option plans.
(2) Comprised of $86,074 of forgiveness of interest on a promissory note payable
to the Company and $1,560 of premiums for insurance policies for which such
person is the beneficiary.
(3) Comprised of premiums for insurance policies where such persons are the
beneficiaries.
(4) Comprised of $1,500 matching contributions made to the Company's 401(k) plan
for the benefit of such person and $594 of premiums for insurance policies
for which such person is the beneficiary.
(5) Includes options to purchase 573 shares of Company Common Stock at a price
of $1.00 per share, options to purchase 2,309 shares of Company Common Stock
at a price of $4.51 per share and options to purchase 1,155 shares of
Company Common Stock at a price of $8.12 per share granted by CapCo to
Jeffrey S. Rubin.
(6) Includes options to purchase 7,457 shares at a price of $1.00 per share,
options to purchase 30,022 shares of Company Common Stock at a price of
$4.51 per share and options to purchase 15,011 shares of Company Common
Stock at a price of $8.12 per share granted by CapCo to Jeffrey S. Rubin.
(7) Comprised of $1,940 for relocation expenses.
(8) Comprised of a $967 matching contribution made to the Company's 401(k) plan
for the benefit of such person and $702 of premiums for insurance policies
for which such person is the beneficiary.
(9) Comprised of a $1,500 matching contribution made to the Company's 401(k)
plan for the benefit of such person and $605 of premiums for insurance
policies for which such person is the beneficiary.
43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to stock options
pursuant to the Company's stock option plans granted to the Named Executive
Officers during fiscal year 1996. All options were granted at an exercise price
equal to the fair market value per share of the Company Common Stock on the date
of grant.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM ($)(3)
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR (2) ($/SH) DATE 5% 10%
- ------------------------------ ------------------ --------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William Y. Tauscher........... 687,434(4)(5)(6) 23.2% 3.00 5/1/05 1,296,971 3,286,778
500,000(7) 16.9% 10.00 3/11/06 3,144,473 7,968,712
Jay S. Amato.................. 300,000(6)(8) 10.1% 3.00 5/1/05 566,005 1,434,368
Jeffrey S. Rubin.............. 250,000 8.4% 3.00 5/1/05 471,671 1,195,307
Ahmad Manshouri............... 75,000(6)(9) 2.5% 3.00 5/1/05 141,501 358,592
Richard N. Anderson........... 85,100(6)(10) 2.9% 3.00 5/1/05 160,557 406,882
</TABLE>
- --------------------------
(1) All options vest in four or five equal annual installments, subject to
acceleration in the event of termination within six months of a change of
control (as defined in the Company's stock option plans), and have a term of
10 years.
(2) The Company granted options to purchase an aggregate of 2,966,943 shares of
Company Common Stock during fiscal year 1996.
(3) Potential realizable value is based on the assumption that the price of the
Company Common Stock appreciates at the annual rate shown, compounded
annually, from the date of grant until the end of the 10-year option term.
The values are calculated in accordance with rules promulgated by the
Commission and do not reflect the Company's estimate of future stock price
appreciation.
(4) Includes options to purchase 325,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
(5) Includes options to purchase 362,434 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $5.55 per share.
(6) The options vest in 20% installments on each of May 1, 1995, 1996, 1997,
1998 and 1999, subject to acceleration in the event of termination within
six months of a change of control (as defined in the Company's stock option
plans).
(7) The options vest in 20% installments on each of May 1, 1996, 1997, 1998,
1999 and 2000, subject to acceleration in the event of termination within
six months of a change of control (as defined in the Company's stock option
plans).
(8) Includes options to purchase 56,726 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share and also includes options to purchase
43,274 shares of Company Common Stock at an exercise price of $3.00 per
share which were granted on May 1, 1995, in exchange for cancellation of
options to purchase a like number of shares at an exercise price of $5.55
per share.
(9) Includes options to purchase 15,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
(10) Includes options to purchase 20,000 shares of Company Common Stock at an
exercise price of $3.00 per share which were granted on May 1, 1995, in
exchange for cancellation of options to purchase a like number of shares at
an exercise price of $6.00 per share.
44
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FY-END OPTION/SAR VALUES
The following table sets forth information with respect to each exercise of
stock options during fiscal 1996, by each of the Named Executive Officers and
the number of options held at fiscal year end and the aggregate value of
in-the-money options held at fiscal year end. None of the Named Executive
Officers exercised options in fiscal 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
SHARES FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ACQUIRED ON VALUE -------------------------- -------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------- ------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William Y. Tauscher.............. -- -- 237,487 949,947 1,794,487 7,297,937
Jay S. Amato..................... -- -- 60,000 240,000 637,800 2,551,200
Jeffrey S. Rubin................. -- -- 50,000 200,000 531,500 2,126,000
Ahmad Manshouri.................. -- -- 15,000 60,000 159,450 637,800
Richard N. Anderson.............. -- -- 31,920 68,080 345,619 723,690
</TABLE>
- ------------------------
(1) Based on the fair market value of the Company Common Stock at year end
($13.63 per share), as reported by the NYSE at the close of business on
April 30, 1996.
Directors who are full-time employees of the Company receive no additional
compensation for services rendered as members of the Board or committees
thereof. Directors who are not full-time employees of the Company receive
reimbursement of out-of-pocket expenses for attendance at Board meetings. All
directors who are not full-time employees of the Company, other than those
directors affiliated with E. M. Warburg, Pincus & Co., Inc., receive an annual
fee of $20,000 and a meeting fee of $1,000 per meeting attended. Each director
who receives a $20,000 annual fee may elect to forego the $20,000 annual payment
and, in lieu thereof, receive an option to purchase 5,000 shares of Company
Common Stock. Messrs. Amerman, Oltman and Weston received options to purchase
20,000 shares of Company Common Stock upon their appointment to the Board. Stock
Option Plans 1988 Stock Option Plan.
In July 1988, the Company adopted a stock option plan (as amended, the "1988
Stock Option Plan") providing for the issuance to key employees and directors of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and stock options that are
non-qualified for federal income tax purposes. The 1988 Stock Option Plan is
administered by the Compensation and Stock Option Committee, which is comprised
of Messrs. Amerman, Janeway and Bard. The Compensation and Stock Option
Committee may, in its discretion, grant tandem stock appreciation rights that
give the employee the right to elect an alternative payment equal to the
appreciation of the stock value instead of exercising the stock options. Members
of the Compensation and Stock Option Committee are not eligible to receive
options under the 1988 Stock Option Plan. The total number of shares of the
Company Common Stock for which options could have been granted pursuant to the
1988 Stock Option Plan was previously 2,300,000; however, in connection with the
adoption of the 1996 Option Plan (as hereinafter defined) the Board reduced the
number of shares of Company Common Stock issuable under the 1988 Stock Option
Plan by 200,000 shares and indicated its intention that substantially all future
grants be made under the 1996 Option Plan.
To the extent future stock options are granted under the 1988 Stock Option
Plan, the exercise price of incentive stock options may not be less than 100% of
the fair market value of Company Common Stock at the time of grant and the term
of any option may not exceed 10 years. With respect to any employee who owns
stock representing more than 10% of the voting power of the outstanding capital
stock of the Company, the exercise price of any incentive stock option may not
be less than 110% of the fair market value of such shares at the time of grant
and the term of such option may not exceed five years. The
45
<PAGE>
exercise price of a non-qualified stock option is determined by the Compensation
and Stock Option Committee at the time such option is granted.
Options granted under the 1988 Stock Option Plan are nontransferable and,
with certain exceptions in the event of the death or disability of an optionee,
may be exercised by the optionee only during employment or within the one or
three month period immediately following termination of employment. Options
granted under the 1988 Stock Option Plan typically vest over a four- or
five-year period, subject to acceleration in the event of termination within six
months of a change of control (as defined in the plan), and expire after 10
years.
1993 STOCK OPTION/STOCK ISSUANCE PLAN. In April 1993, the Company adopted a
stock option/stock issuance plan (the "1993 Stock Plan"; and the 1988 Stock
Option Plan and the 1993 Stock Plan, collectively, the "Old Stock Option Plans")
providing for the issuance to highly compensated, managerial employees, officers
and directors of incentive stock options within the meaning of Section 422 of
the Code, stock options that are non-qualified for federal income tax purposes
and performance bonus shares of Company Common Stock. The 1993 Stock Plan is
administered by the Compensation and Stock Option Committee. The Compensation
and Stock Option Committee may, in its discretion, grant tandem stock
appreciation rights that give the employee the right to elect an alternative
payment equal to the appreciation of the stock value instead of exercising the
stock options. Members of the Compensation and Stock Option Committee are not
eligible to receive options under the 1993 Stock Plan. The total number of
shares of Company Common Stock originally issuable pursuant to the 1993 Stock
Plan, whether under options or directly, was 2,500,000; however, in connection
with the adoption of the 1996 Option Plan, the Board reduced the number of
shares of Company Common Stock issuable under the 1993 Stock Plan by 100,000
shares and indicated its intention that substantially all future grants be made
under the 1996 Option Plan.
To the extent future stock options are granted under the 1993 Stock Plan,
the exercise price and term of incentive stock options are subject to the same
limitations described above with respect to the 1988 Stock Option Plan. The
option price of a non-qualified stock option is determined by the Compensation
and Stock Option Committee at the time such option is granted; provided that the
exercise price of non-qualified stock options granted under the 1993 Stock Plan
and the purchase price of shares of Company Common Stock issued under such Plan
may not be less than 85% of the fair market value of the Company Common Stock at
the time of grant or issuance. As an additional component of the 1993 Option
Plan, shares of Company Common Stock may be issued under the 1993 Stock Plan as
a performance bonus.
Options granted under the 1993 Stock Plan are nontransferable and, with
certain exceptions in the event of the death or disability of an optionee, may
be exercised by the optionee only during employment or within a one or three
month period immediately following termination of employment. Options granted
under the 1993 Stock Plan typically vest over a four- or five-year period,
subject to acceleration in the event of termination within six months of a
change of control (as defined in the plan), and expire after 10 years.
Although future grants under the Old Stock Option Plans may be made, the
Board of Directors of the Company intends that substantially all future stock
option grants will be made pursuant to the 1996 Option Plan. Grants under the
Old Stock Option Plans will only be made to the extent of the shares remaining
reserved thereunder and to the extent that currently outstanding options
thereunder expire or are cancelled without being fully exercised, in which case
the underlying shares become available for future grants under the respective
terms of such plans. As of October 31, 1996 options exercisable for 1,788,254
shares of Company Common Stock were issued under the 1988 Stock Option Plan and
options exercisable for 2,289,739 shares of Company Common Stock were issued
under the 1993 Stock Plan.
1996 STOCK OPTION/STOCK ISSUANCE PLAN. In August 1996, the Company adopted
the 1996 Stock Option/Stock Issuance Plan (as amended, the "1996 Option Plan"),
which provides for the grant to directors, officers and employees of the Company
and independent consultants retained by the Company, of stock options, including
both incentive stock options and non-qualified stock options, and direct grants
46
<PAGE>
of Company Common Stock. The maximum aggregate number of shares of Company
Common Stock reserved for issuance under the 1996 Option Plan is 3,300,000
shares.
Similar to the 1993 Option Plan, the 1996 Option Plan is divided into two
separate components: the "Option Grant Program" and the "Stock Issuance
Program." Under the Option Grant Program, eligible individuals may be granted
options to purchase shares of the Company Common Stock at an exercise price to
be determined by the Compensation and Stock Option Committee (except that, in
the case of an incentive stock option, such exercise price may not be less than
100% (or 110% in the case of an incentive stock option granted to a 10%
stockholder)) of the fair market value of the Company Common Stock on the date
of grant. Under the Stock Issuance Program, eligible individuals may be issued
shares of Company Common Stock directly, either through the immediate purchase
of such shares at a price to be determined by the Compensation and Stock Option
Committee or as a bonus tied to the performance of services or the Company's
attainment of financial objectives, without any cash payment required of the
recipient. Such shares may be fully vested when issued or may vest over time.
The 1996 Option Plan is administered by the Compensation and Stock Option
Committee. The Compensation and Stock Option Committee has full authority to
determine (i) with respect to the option grants, the number of shares to be
covered by each such grant, the per share exercise price thereof, the status of
the granted option as either an incentive stock option or a non-qualified stock
option, the time or times at which each granted option is to become purchasable
under the option and the maximum term for which the option may remain
outstanding, and (ii) with respect to share issuances under the Stock Issuance
Program, the number of shares to be issued to each participant, the vesting
schedule (if any) to be applicable to the issued shares and the consideration to
be paid by the individual for such shares. The Compensation and Stock Option
Committee has the absolute discretion either to grant options in accordance with
the Option Grant Program or to effect share issuances in accordance with the
Stock Issuance Program. Options granted and stock issued pursuant to the 1996
Option Plan are evidenced by instruments (which need not be identical) in such
form as the Compensation and Stock Option Committee may, from time to time,
authorize. As allowed by the 1996 Plan, the Compensation and Stock Option
Committee has delegated to the Company's Chairman and Chief Executive Officer
the authority to make option rants and share issuances to persons who are not
subject to the reporting requirements of Section 16 of the Exchange Act with
respect to the Company.
Options granted pursuant to the 1996 Option Plan will be exercisable at such
rate as may be determined by the Compensation and Stock Option Committee.
Options granted under the 1996 Option Plan will generally expire after ten
years, unless terminated earlier or as otherwise determined by the Compensation
and Stock Option Committee at the time of grant. Options granted under the 1996
Option Plan will be nontransferable and, with certain exceptions in the event of
the death or disability of an optionee, may be exercised by the optionee only
during employment or within the one to three month period following termination
of employment in accordance with the plan.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted, effective with its IPO, an employee stock purchase plan
(the "Stock Purchase Plan"). Under the Stock Purchase Plan, eligible employees
are granted options (exercisable by electing to participate in the plan) to
purchase shares of Company Common Stock generally through regular payroll
deductions. The Stock Purchase Plan is intended to qualify as an employee stock
purchase plan under Section 423 of the Code. The total number of shares of
Company Common Stock that are authorized for issuance under the Stock Purchase
Plan is 1,000,000. All full-time and certain part-time employees of the Company
are eligible to participate in the Stock Purchase Plan, subject to certain
limited exceptions. Options are granted generally every six months to eligible
employees and, if not exercised, expire on the last day of the sixth-month
period in which granted. Employees electing to participate for any semi-annual
period authorize payroll deductions at a stated whole percentage ranging from 2%
to 10% of compensation, as determined by the participant. Options are
nontransferable other than by will or by operation of
47
<PAGE>
the laws of descent and distribution. The purchase price for shares offered
under the Stock Purchase Plan each year will be equal to a percentage designated
by the Board of Directors (not less than 85%) of the lower of the fair market
value of Company Common Stock at the date of grant or the semi-annual date of
exercise as evidenced by the initial public offering price per share in the case
of options granted on the date of the IPO ($10.00 per share) or, in all other
cases, by the closing price of Company Common Stock on such date as reported on
the NYSE. The Stock Purchase Plan will expire on March 11, 2006, unless sooner
terminated by the Board of Directors or all shares of Company Common Stock
available for issuance under the Stock Purchase Plan have been sold. The Board
of Directors of the Company may amend, suspend or terminate the Stock Purchase
Plan at any time and from time to time, subject to certain limitations. The
Stock Purchase Plan is administered by the Compensation and Stock Option
Committee.
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company Common Stock as of December 31, 1996 by (i) each person
known to the Company to own beneficially more than 5% of the outstanding Company
Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv)
all directors and executive officers of the Company as a group. Except as
otherwise stated, the Company believes that each of the beneficial owners named
in the table has sole voting and investment power with respect to all shares
beneficially owned by such stockholder as set forth opposite such stockholder's
name, subject to applicable community property laws. Except as noted below, the
address of each director and Named Executive Officer is c/o Vanstar Corporation,
5964 West Las Positas Boulevard, Pleasanton, California 94588.
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL
NAME OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK PERCENT (1)
- --------------------------------------------------------------------------- ------------------------ -------------
<S> <C> <C>
Warburg, Pincus Capital Company, L.P. (2).................................. 13,878,401.21 32.8%
466 Lexington Avenue
10th Floor
New York, NY 10017
William Y. Tauscher (3).................................................... 2,370,284.49 5.6
Jeffrey S. Rubin (4)....................................................... 196,910.00 *
Ahmad Manshouri (5)........................................................ 8,507.00 *
Richard N. Anderson (6).................................................... 7,801.00 *
Richard H. Bard (7)........................................................ 623,528.26 1.5
Stephen W. Fillo (8)....................................................... 5,000.00 *
Stewart K.P. Gross (9)(2).................................................. 13,878,401.21 32.8
William H. Janeway (9)(2).................................................. 13,878,401.21 32.8
John L. Vogelstein (9)(2).................................................. 13,878,401.21 32.8
Jay S. Amato (10).......................................................... 164,998.50 *
John W. Amerman (11)....................................................... 9,000.00 *
Josh S. Weston (11)........................................................ 9,000.00 *
John R. Oltman (11)........................................................ 9,000.00 *
All directors and executive officers as a group (20 persons) (12)(9)....... 17,300,409.69 39.8
</TABLE>
- ------------------------
* Less than one percent.
(1) Applicable percentage of ownership is based on 42,301,215 shares of Company
Common Stock outstanding as of December 31, 1996, together with the
applicable options for such stockholder. Beneficial ownership is determined
in accordance with the rules of the Commission and generally includes voting
or investment power with respect to securities, subject to community
property laws, where applicable. Shares of Company Common Stock subject to
options that are presently exercisable or exercisable within 60 days are
deemed to be beneficially owned by the person holding such options
48
<PAGE>
for the purpose of computing the percentage of ownership of such person but
are not treated as outstanding for the purpose of computing the percentage
of any other person.
(2) The sole general partner of CapCo is Warburg, Pincus & Co., a New York
general partnership ("WP"). Lionel I. Pincus is the Managing Partner of WP
and may be deemed to control WP. E.M. Warburg Pincus & Co., Inc. ("EMWP"),
through a wholly-owned subsidiary, manages CapCo. WP owns all of the
outstanding stock of EMWP and, as the general partner of CapCo, has a 20%
interest in the profits of CapCo. EMWP owns 0.9% of the limited partnership
interests in CapCo. Number of shares includes 84,794 shares that are subject
to options granted to Jeffrey S. Rubin as described under note (4) below.
(3) Includes 374,974 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock options
plans that are either presently exercisable or become exercisable within 60
days.
(4) Includes 100,000 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days,
55,429 shares subject to exercise within 60 days under a presently-
exercisable stock option issued by CapCo, exercisable at $4.51 per share
until 2005, 27,713 shares subject to exercise within 60 days under a
presently-exercisable stock option issued by CapCo, exercisable at $8.12 per
share until 2005, 1,042 shares subject to exercise within 60 days under a
presently-exercisable stock option issued by CapCo, exercisable at $1.00 per
share until 2000, and 12,726 shares subject to exercise within 60 days under
a presently-exercisable stock option issued by CapCo, exercisable at $1.00
per share until 2005.
(5) Includes 7,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days
and 1,494 shares of Company Common Stock held for the benefit of Mr.
Manshouri in an employee plan formerly sponsored by Infomax, Inc. Also
includes 13 shares held for the benefit of Mr. Manshouri's wife.
(6) Includes 7,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(7) Includes 367,434 shares of Company Common Stock reserved for issuance upon
the exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(8) Consists of 5,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
Pursuant to an arrangement between WP and Mr. Fillo, Mr. Fillo has an
indirect pecuniary interest in the capital stock of the Company owned by
CapCo. Mr. Fillo disclaims beneficial ownership of all such capital stock
within the meaning of the Exchange Act.
(9) Mr. Gross, Mr. Janeway and Mr. Vogelstein, directors of the Company, are
Managing Directors of EMWP and general partners of WP. As such, Mr. Gross,
Mr. Janeway and Mr. Vogelstein may be deemed to have an indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange Act), in an
indeterminate portion of the shares beneficially owned by CapCo. All of the
shares indicated as owned by Mr. Gross, Mr. Janeway and Mr. Vogelstein are
owned beneficially by CapCo and are included because of the affiliation of
such persons with CapCo. Mr. Gross, Mr. Janeway and Mr. Vogelstein disclaim
beneficial ownership of these shares within the meaning of Rule 13d-3 under
the Exchange Act.
49
<PAGE>
(10) Includes 140,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(11) Includes 9,000 shares of Company Common Stock reserved for issuance upon
exercise of stock options granted under the Company's stock option plans
that are either presently exercisable or become exercisable within 60 days.
(12) Includes 1,138,956 shares of Company Common Stock reserved for issuance
upon exercise of stock options granted under the Company's stock option
plans that are either presently exercisable or become exercisable within 60
days.
50
<PAGE>
CERTAIN TRANSACTIONS
In March 1993, the Company sold and issued an aggregate of (i) 1,538,462
shares of Company Common Stock to WP CapCo, Inc., then a wholly-owned subsidiary
of CapCo, (ii) warrants to purchase an aggregate of 3,846,155 shares of Company
Common Stock to CapCo, (iii) 307,692 shares of Company Common Stock and warrants
to purchase an aggregate of 769,230 shares of Company Common Stock to William Y.
Tauscher, Chairman of the Board and Chief Executive Officer, and (iv) 769,230
shares of Company Common Stock and warrants to purchase an aggregate of
1,923,075 shares of Company Common Stock to Nynex Worldwide Services Group, Inc.
("Nynex Worldwide Services"). The foregoing shares were sold at $6.00 per share
and the foregoing warrants (the "1993 Warrants") were sold at a purchase price
of $.20 per warrant share, with an exercise price of $11.00 per share and a term
of ten years. Mr. Tauscher paid for such shares and 1993 Warrants by delivering
to the Company a $1,999,690 principal amount promissory note (the "Tauscher
Note") and paid the balance in cash. The Tauscher Note was secured by the shares
and 1993 Warrants purchased. On March 17, 1994, Mr. Tauscher repaid $1,000,000
of the aggregate principal amount of the Tauscher Note. In May 1994, the Company
repurchased from Mr. Tauscher an aggregate of 153,846 shares of Company Common
Stock and 1993 Warrants to purchase an aggregate of 384,615 shares of Company
Common Stock at a price of $6.00 per share and $.20 per Warrant share (or an
aggregate purchase price of $999,690). Such purchase price was paid by
cancellation of $999,690 of the principal amount of the Tauscher Note.
Simultaneously, the Company forgave $86,074 of interest accrued on the Tauscher
Note.
Upon consummation of the IPO, all of the 1993 Warrants that were outstanding
and additional warrants (the "1990 Warrants") originally issued by the Company
with an exercise price of $8.32 per share and a term expiring in 2000 were
exchanged for shares of Company Common Stock. The 1990 Warrants were issued to
CapCo to purchase an aggregate of 339,282.32 shares of Company Common Stock, to
William Y. Tauscher to purchase an aggregate of 72,703.35 shares of Company
Common Stock and to Richard H. Bard, a director of the Company, to purchase an
aggregate of 72,703.35 shares of Company Common Stock. Effective upon
consummation of the IPO, the 1993 Warrants were exchanged for 2,545,151 and
254,515 shares of Company Common Stock, respectively, in respect of the 1993
Warrants held by CapCo and Mr. Tauscher and for 295,858 shares of Company Common
Stock in respect of the 1993 Warrant held by Nynex Worldwide Services. The 1990
Warrants were exchanged for an aggregate of 297,558 shares of Company Common
Stock. In addition, warrants to purchase an aggregate 54,261 shares of Company
Common Stock at an exercise price of $5.00 per share with a term expiring in May
2000 held by CapCo were exchanged for an aggregate of 39,966 shares of Company
Common Stock in connection with the IPO.
In June 1993, the Company issued 577,083 shares of Company Common Stock (at
a rate of $6.00 per share) to Nynex Worldwide Services in satisfaction of
certain accrued and unpaid dividends due June 1993 on the Senior Preferred Stock
held by Nynex Worldwide Services; and on October 1, 1994, the Company issued a
$2,462,500.25 promissory note to Nynex Worldwide Services and paid Nynex
Worldwide Services $1,000,000, which note and cash payment were delivered in
satisfaction of the accrued and unpaid dividends due June 1, 1994 on the Senior
Preferred Stock held by Nynex Worldwide Services. Such note, which matured on
June 1, 1995 and bore interest at a rate of 9.75%, was cancelled in exchange for
a cash payment of $2,462,500.25 plus accrued and unpaid interest out of funds
received in connection with the IPO, and such shares of Senior Preferred Stock
were converted on a one-for-one basis into shares of Company Common Stock that
were sold by Nynex Worldwide Services in the IPO (and accrued and unpaid
dividends thereon were forgiven).
In October 1993, the Company made a $150,000 interest-free loan to Robert
Kuntzendorf, an executive officer, to finance the purchase of a home. Such loan
was repaid in full in June 1994.
51
<PAGE>
In July 1992, in connection with the purchase of a former Company
franchisee, the Company received a three year non-recourse promissory note in
the principal amount of $333,333.00 from Ahmad Manshouri, an executive officer,
and his wife. Payment of such note was secured by the pledge of 27,778 shares of
Company Common Stock held by Mr. and Mrs. Manshouri. In October 1995, Mr. and
Mrs. Manshouri transferred all of the pledged shares to the Company in lieu of
making payment on such note.
The Company has granted options to purchase Company Common Stock to certain
of its executive officers and directors. See "Management--Executive
Compensation."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors of the Board of
Directors.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 100,000,000
shares of common stock, par value $.001 per share, and (ii) 15,000,000 shares of
preferred stock, par value $.01 per share, which are subject to future issuance
as determined by the Board of Directors of the Company.
COMMON STOCK
Holders of Company Common Stock are entitled to one vote per share on all
matters on which the holders of Company Common Stock are entitled to vote and do
not have any cumulative voting rights. Holders of Company Common Stock are
entitled to receive such dividends as may from time to time be declared by the
Board of Directors of the Company out of funds legally available therefor.
Holders of Company Common Stock have no preemptive, conversion, redemption or
sinking fund rights. In the event of a liquidation, dissolution or winding-up of
the Company, holders of Company Common Stock are entitled to share ratably in
the assets of the Company, if any, remaining after the payment of all debts and
liabilities of the Company and the liquidation preference of any outstanding
series of preferred stock. The outstanding shares of Company Common Stock are
fully paid and nonassessable. The rights, preferences and privileges of holders
of Company Common Stock are subject to any series of Preferred Stock that the
Company may issue in the future.
PREFERRED STOCK
The Board of Directors is authorized to provide for the issuance of
Preferred Stock in one or more series and to fix the number of shares
constituting any such series, the voting powers, designations, preferences and
relative, participating, optional or other special rights and qualifications,
limitations or restrictions thereof, including the dividend rights, redemption
privileges, conversion rights and liquidation preferences of the shares
constituting any series, without any further vote or action by the stockholders
of the Company. The issuance of Preferred Stock by the Board of Directors could
adversely affect the rights of holders of Company Common Stock. For example,
issuance of Preferred Stock could result in a series of securities outstanding
that would have preferences over the Company Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights appurtenant to Company Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy, consent or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue Preferred Stock without stockholder approval and with voting and
conversion rights that could adversely affect the voting power of holders of
Company Common Stock. There are no
52
<PAGE>
agreements or understandings for the issuance of Preferred Stock, and the Board
of Directors has no present intention to issue Preferred Stock.
REGISTRATION RIGHTS
The Company has granted to the owners of approximately 19,198,483 shares of
Company Common Stock (including a number of shares subject to exercise under
presently-exercisable options) the right to request that the Company effect the
registration of any or all of such shares or to include any or all of such
shares in any registration statement to be filed by the Company relating to the
registration of Company Common Stock under the Securities Act (other than
registration statements on Form S-4 or Form S-8). Upon such request, the Company
is required to file a registration statement covering such shares or to include
such shares in such registration statement, as applicable, except that, in the
case of certain requested registrations, the Company is not obligated to file
any registration statement initiated pursuant to a request by any such holder
within six months of a prior request for registration by any such holder. In
certain cases, the Company's obligation to effect any such requested
registration is subject to other limitations, including a minimum aggregate
offering price of the shares being registered.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL ("Section 203") prevents an "interested stockholder"
(defined in Section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved either the business combination
or the transaction in which the interested stockholder became an interested
stockholder; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.
DIRECTORS' LIABILITY
The Certificate of Incorporation contains provisions that eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty other than liability for breaches of the duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
DGCL or any transaction from which the director derived an improper personal
benefit. The Company's By-laws contain provisions requiring the indemnification
of the Company's directors and officers to the fullest extent permitted by
Section 145 of the DGCL, including circumstances in which indemnification is
otherwise discretionary. The Company has entered into indemnification agreements
with each of its directors that provide for indemnification of such directors to
the fullest extent permitted by the DGCL. The Company believes that these
provisions and agreements are necessary to attract and retain qualified persons
as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company Common Stock is ChaseMellon
Shareholder Services.
53
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder and the
number of Shares that may be offered by each. The number of Shares that may be
actually sold by each of the Selling Stockholders will be determined by each
such Selling Stockholder, and may depend upon a number of factors, including,
among other things, the market price of the Company Common Stock. Because each
of the Selling Stockholders may offer all, some or none of the Shares that each
holds, and because the offering contemplated by this Prospectus is currently not
being underwritten, no estimate can be given as to the number of Shares that
will be held by each of the Selling Stockholders upon or prior to termination of
this offering. See "Plan of Distribution." The table below sets forth
information as of December 31, 1996, concerning the beneficial ownership of the
Shares of each of the Selling Stockholders. All information as to beneficial
ownership has been furnished by each of the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES OF COMPANY COMMON STOCK
OWNED BEFORE OFFERING SHARES OF COMPANY
------------------------------ COMMON STOCK OFFERED
NAME OF SELLING STOCKHOLDER NUMBER PERCENT (1) IN THE OFFERING
- --------------------------------------------------------------- ------------- --------------- ---------------------
<S> <C> <C> <C>
Malbert Smith, III............................................. 428,621(2) 1.0% 428,621(2)
A. Jackson Stenner............................................. 428,621(2) 1.0 428,621(2)
Creditanstalt American Corporation............................. 95,249(3) * 95,249(3)
DCT Systems, Inc............................................... 10,000(4) * 10,000(4)
Niloy, Inc..................................................... 30,000(5) * 30,000(5)
NCT Systems, Inc............................................... 140,000(6) * 140,000(6)
</TABLE>
- ------------------------
* Less than one percent.
(1) Percentage indicated is based upon 42,301,215 shares of Company Common Stock
outstanding on December 31, 1996, but does not include shares of Company
Common Stock issued or issuable by the Company thereafter.
(2) Includes 42,862 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive October 31, 1997 upon the expiration of an escrow
established in connection with the Company's acquisition of CDS.
(3) Includes 9,524 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive October 31, 1997 upon the expiration of an escrow
established in connection with the Company's acquisition of CDS.
(4) Includes 6,667 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 1998, 1,111 shares of Company Common
Stock that such Selling Stockholder may be entitled to receive January 9,
1999 and 2,222 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 2000, pursuant to the terms of an
escrow established in connection with the Company's acquisition of certain
assets from DCT.
(5) Includes 20,000 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 1998, 3,333 shares of Company Common
Stock that such Selling Stockholder may be entitled to receive January 9,
1999 and 6,667 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 2000, pursuant to the terms of an
escrow established in connection with the Company's acquisition of certain
assets from DCT.
(6) Includes 93,333 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 1998, 15,556 shares of Company Common
Stock that such Selling Stockholder may be entitled to receive January 9,
1999 and 31,111 shares of Company Common Stock that such Selling Stockholder
may be entitled to receive January 9, 2000, pursuant to the terms of an
escrow established in connection with the Company's acquisition of certain
assets from DCT.
54
<PAGE>
ACQUISITION OF CONTRACT DATA SERVICES, INC.
On December 16, 1996, the Company consummated the merger of CDS with and
into a wholly owned subsidiary of the Company (the "CDS Merger"). The CDS Merger
will be accounted for by the Company under the "pooling of interests" method of
accounting. The aggregate consideration received by the shareholders of CDS in
connection with the CDS Merger consisted solely of 952,491 shares of Company
Common Stock (having an aggregate value on the closing date of approximately
$21.9 million). Ten percent (10%) of the shares issued in connection with the
CDS Merger (95,249 shares of Company Common Stock) were deposited into escrow
for a period of approximately 10 months to satisfy certain indemnification
obligations of CDS. The Company granted certain registration rights to the
persons receiving its stock in the CDS Merger and pursuant thereto has
registered for resale in the offering made hereby 952,491 shares of Company
Common Stock. The costs of this registration (other than brokerage commissions
and similar expenses) are being paid by the Company. To the extent any of the
shares of Company Common Stock issued in connection with the CDS Merger are
transferred back to the Company upon expiration of the applicable Escrow
Agreement, the Registration Statement of which this Prospectus forms a part will
be amended to deregister such number of Shares. CDS provides outsourcing of
integrated information technology services, related technical support services
and procurement of computer hardware and software. For the fiscal year ended
March 31, 1996, CDS reported total revenues of approximately $74.3 million.
ACQUISITION OF CERTAIN ASSETS FROM DCT
On January 9, 1997, the Company consummated the acquisition of inventory and
equipment from DCT. In connection therewith, DCT will receive cash equal to the
value of such assets (which is to be determined following the closing) and
180,000 shares of Company Common Stock (the "DCT Shares"), which are to be held
in escrow. The Company currently anticipates that the cash portion of the
purchase price will equal between $3.0 and $5.0 million. Based on the closing
market price of the Company Common Stock on the closing date of the DCT
acquisition, the DCT Shares have an aggregate value of approximately $3.92
million. The DCT Shares will be released from escrow as follows: (i) 120,000 on
the first anniversary of the closing, (ii) 20,000 on the second anniversary of
the closing and (iii) 40,000 on the third anniversary of the closing, in each
case subject to the satisfaction of certain conditions described in a Servicing
and Marketing Agreement between the Company and DCT entered into on January 9,
1997 (the "Service Agreement"). Under the Service Agreement, the Company will
supply certain computer products and billing services to DCT. DCT may earn
commissions under the Service Agreement based upon the level of DCT's product
and service revenue, payable at the election of DCT in cash or restricted shares
of Company Common Stock (such number not to exceed 40,000 shares of Company
Common Stock). The Company has granted certain registration rights to the
entities receiving its stock in the acquisition of certain assets from DCT and
pursuant thereto has registered for resale in the offering made hereby, 180,000
shares of Company Common Stock. The costs of this registration (other than
brokerage commissions and similar expenses) are being paid by the Company. To
the extent any of the DCT Shares are transferred back to the Company pursuant to
the terms of the applicable Escrow Agreement, the Registration Statement of
which this Prospectus forms a part will be amended to deregister such number of
Shares.
Other than as set forth in this section entitled "Selling Stockholders,"
none of the parties to the transactions described herein were affiliated with
the Company within the last three fiscal years.
PLAN OF DISTRIBUTION
The Company will receive no proceeds from the sale of the Shares by the
Selling Stockholders. The Shares may be sold from time to time to purchasers
directly by the Selling Stockholders. Alternatively, the Selling Stockholders
may sell the Shares in one or more transactions (which may involve one or more
block transactions) on the NYSE, in privately negotiated transactions or
otherwise or in a combination of such
55
<PAGE>
transactions; each sale may be made either at market prices prevailing at the
time of such sale or at negotiated prices; some or all of the Shares may be sold
through broker-dealers acting as brokers or agents on behalf of the Selling
Stockholders or to broker-dealers acting as principals for resale by such
dealers; and in connection with such sales, such broker-dealers may receive
compensation in the form of commissions, discounts or fees from the Selling
Stockholders and/or the purchasers of such shares for whom they may act as
broker or agent. It is anticipated that the Selling Stockholders will offer all
of the Shares for sale. All expenses of registration incurred in connection with
this offering are being borne by the Company, but all brokerage commissions and
other similar expenses incurred by the Selling Stockholders will be borne by the
Selling Stockholders.
The Company anticipates that the Shares will be offered for sale, from time
to time after the effectiveness of the Registration Statement of which this
Prospectus forms a part until the earlier of (a) the sale of all of such Shares
or (b) February , 2000 (the "Registration Period"). However, the Company may,
from time to time, upon proper notice to the shareholders receiving Company
Common Stock in the CDS transaction, terminate or suspend the effectiveness of
the Registration Statement in certain circumstances for a period of not more
than 90 days. Additionally, certain holders of the Company's Common Stock have
the right to require the Company to register certain shares held by or issuable
to such holders with the Commission. The Company may, upon the written request
of any such holders, terminate or suspend the effectiveness of the Registration
Statement until the expiration of 90 days after the date of the completion of
any such underwritten offering. To the extent that the Company terminates or
suspends the effectiveness of the Registration Statement as described herein, it
is required, pursuant to the terms of the Registration Rights Agreement executed
in connection with the CDS transaction, to extend the Registration Period beyond
February , 2000 for a like period.
At the time a particular offer of Shares is made, to the extent required, a
Prospectus Supplement will be distributed that will identify and set forth the
aggregate amount of Shares being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, the purchase
price paid by any underwriter for Shares purchased from the Selling
Stockholders, any commissions, discounts and other items constituting
compensation from the Selling Stockholders and any commissions, discounts or
concessions allowed or reallowed or paid to dealers, including the proposed
selling price to the public.
Each Selling Stockholder and any dealer acting in connection with the
offering of any of the Shares or any broker executing the selling orders on
behalf of any of the Selling Stockholders may be deemed to be "underwriters"
within the meaning of the Securities Act, in which event any profit on the sale
of any or all of the Shares and any commissions, discounts or concessions
received by any such dealers or brokers may be deemed to be underwriting
commissions and discounts under the Securities Act. Any dealer or broker
participating in any distribution of the Shares may be required to deliver a
copy of this Prospectus, including the Prospectus Supplement, to any person who
purchases any of the Shares from or through such dealer or broker.
The Selling Stockholders will be subject to applicable provisions of the
Exchange Act and rules and regulations thereunder, which provisions may limit
the timing of purchases and sales of any of the Shares by the Selling
Stockholders. The foregoing may affect the marketability of such securities.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the Shares may not be sold unless the
Shares have been registered and qualify for sale in such state, or unless an
exemption from registration or qualification is available and is obtained.
In connection with the offering made hereby, the Selling Stockholders will
be indemnified by the Company jointly and severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith. Additionally, the Company will
be indemnified by the Selling Stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
56
<PAGE>
LEGAL MATTERS
The validity of the Shares offered hereby have been passed upon for the
Company by Arter & Hadden, Dallas, Texas.
EXPERTS
The consolidated financial statements and schedule of Vanstar Corporation at
April 30, 1996 and 1995, and for the years then ended, the seven month period
ended April 30, 1994 and the year ended September 30, 1993, included in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as stated in their reports thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
57
<PAGE>
VANSTAR CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report (Ernst & Young LLP)......................................................... F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Income........................................................................ F-4
Consolidated Statements of Stockholders' Equity.......................................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................................................. F-19
Consolidated Statements of Income........................................................................ F-20
Consolidated Statements of Cash Flows.................................................................... F-21
Notes to Consolidated Financial Statements............................................................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Vanstar Corporation
We have audited the accompanying consolidated balance sheets of Vanstar
Corporation as of April 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
April 30, 1996 and 1995, the seven month period ended April 30, 1994 and the
year ended September 30, 1993. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vanstar
Corporation at April 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for years ended April 30, 1996 and 1995, the seven
month period ended April 30, 1994 and the year ended September 30, 1993, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Jose, California
June 10, 1996
F-2
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash............................................ $ 14,498 $ 7,761
Receivables, net of allowance for doubtful
accounts of $14,812 and $12,326 at April 30,
1996 and 1995, respectively................... 298,484 261,308
Inventories..................................... 350,406 298,686
Deferred income taxes........................... 25,750 35,779
Prepaid expenses and other current assets....... 2,432 1,193
---------- ----------
Total current assets.......................... 691,570 604,727
Property and equipment, net....................... 23,183 19,832
Other assets, net................................. 48,899 39,296
Goodwill, net of accumulated amortization of
$3,453 and $1,726 at April 30, 1996 and 1995,
respectively.................................... 39,713 41,440
---------- ----------
$ 803,365 $ 705,295
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................ $ 305,374 $ 263,197
Accrued liabilities............................. 41,586 39,110
Deferred revenue................................ 27,109 26,883
Current maturities of long-term debt............ 1,759 7,685
---------- ----------
Total current liabilities..................... 375,828 336,875
Long-term debt, less current maturities........... 293,007 337,750
Other long-term liabilities....................... 7,477 8,081
Commitments and contingencies..................... -- --
Stockholders' equity:
Preferred stock................................. -- 153
Common stock:
Class A; $.001 par value: 100,000,000 shares
authorized, 40,475,144 shares issued and
outstanding at April 30, 1996; 50,000,000
shares authorized, 7,323,508 issued and
outstanding at April 30, 1995............... 40 7
Class B; $.001 par value; no shares
authorized, issued or outstanding at April
30, 1996; 18,800,000 shares authorized,
3,708,205 issued and outstanding at April
30, 1995.................................... -- 4
Additional paid-in capital...................... 115,097 24,768
Retained earnings (accumulated deficit) (since a
deficit elimination of $78,448 at April 30,
1994)......................................... 11,916 (2,343)
---------- ----------
Total stockholders' equity.................. 127,053 22,589
---------- ----------
$ 803,365 $ 705,295
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, SEVEN MONTHS YEAR ENDED
-------------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Products............................................. $ 1,578,298 $ 1,187,392 $ 490,576 $ 935,165
Services............................................. 226,515 198,000 95,938 164,648
------------ ------------ ------------- -------------
Total revenue...................................... 1,804,813 1,385,392 586,514 1,099,813
------------ ------------ ------------- -------------
Cost of revenue:
Products............................................. 1,430,404 1,073,879 437,316 824,514
Services............................................. 129,482 100,975 52,196 97,275
------------ ------------ ------------- -------------
Total cost of revenue............................ 1,559,886 1,174,854 489,512 921,789
------------ ------------ ------------- -------------
Gross margin........................................... 244,927 210,538 97,002 178,024
Selling, general and administrative expenses........... 201,880 182,411 97,436 181,320
------------ ------------ ------------- -------------
Operating income (loss)................................ 43,047 28,127 (434) (3,296)
Interest income...................................... 5,539 6,577 1,608 849
Interest expense..................................... (35,804) (32,555) (12,789) (23,045)
------------ ------------ ------------- -------------
Income (loss) from continuing operations before income
taxes................................................ 12,782 2,149 (11,615) (25,492)
Income tax benefit (provision)....................... (4,729) (881) 4,646 6,741
------------ ------------ ------------- -------------
Income (loss) from continuing operations............... 8,053 1,268 (6,969) (18,751)
Income from operations of discontinued businesses
(less income taxes of $3,693 in 1994 and $6,811 in
1993).............................................. -- -- 6,426 14,258
Gain on disposal of discontinued businesses (less
income taxes of $5,400 in 1996 and $10,706 in 1994
and $0 in 1993).................................... 9,194 -- 45,048 247
------------ ------------ ------------- -------------
Net income (loss)...................................... $ 17,247 $ 1,268 $ 44,505 $ (4,246)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Pro forma net income per share:
Continuing operations................................ $ 0.23 $ 0.04
Discontinued operations.............................. 0.27 --
------------ ------------
Total pro forma net income per share................... $ 0.50 $ 0.04
------------ ------------
------------ ------------
Shares used in pro forma per share calculation......... 34,250 32,486
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON
PREFERRED STOCK STOCK A STOCK B
----------------- -------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992................... 9,766 $ 28,495 4,118 $ 4 3,708 $ 4
Issuance of Class A Common Stock................ -- -- 3,267 3 -- --
Amortization of deferred compensation........... -- -- -- -- -- --
Issuance of warrants............................ -- -- -- -- -- --
Translation adjustments......................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
Dividends....................................... -- -- -- -- -- --
------- -------- ------ ------ ------ ------
Balance at September 30, 1993................... 9,766 28,495 7,385 7 3,708 4
Conversion of Class A, C, and D Preferred Stock
and accrued dividends to Class F Preferred
Stock.......................................... 5,543 (28,342) -- -- -- --
Payment on shareholder note receivable.......... -- -- -- -- -- --
Issuance of Class A Common Stock................ -- -- 75 -- -- --
Translation adjustments......................... -- -- -- -- -- --
Sale of international businesses................ -- -- -- -- -- --
Net income...................................... -- -- -- -- -- --
Dividends....................................... -- -- -- -- -- --
Quasi-reorganization:
Revaluation adjustments, net.................. -- -- -- -- -- --
Transfer from accumulated deficit............. -- -- -- -- -- --
------- -------- ------ ------ ------ ------
Balance at April 30, 1994....................... 15,309 153 7,460 7 3,708 4
Redemption of Class A Common Stock.............. -- -- (154 ) -- -- --
Issuance of Class A Common Stock................ -- -- 17 -- -- --
Redemption of Class E Preferred Stock........... -- -- -- -- -- --
Net income...................................... -- -- -- -- -- --
Dividends....................................... -- -- -- -- -- --
------- -------- ------ ------ ------ ------
Balance at April 30, 1995....................... 15,309 153 7,323 7 3,708 4
Redemption of Class A Common Stock.............. -- -- (103 ) -- -- --
Issuance of warrants -- -- -- -- -- --
Conversion of Class F Preferred Stock and Senior
Preferred Stock to Class A Common Stock........ (15,309) (153) 15,309 15 -- --
Conversion of Class B Common Stock to Class A
Common Stock................................... -- -- 3,708 4 (3,708) (4)
Conversion of Warrants to Class A Common Stock.. -- -- 4,996 5 -- --
Issuance of Class A Common Stock................ -- -- 9,216 9 -- --
Accrued Dividends Forgiven--Senior Preferred
Stock.......................................... -- -- -- -- -- --
Exercise of Options............................. -- -- 26 -- -- --
Net income...................................... -- -- -- -- -- --
Dividends....................................... -- -- -- -- -- --
------- -------- ------ ------ ------ ------
Balance at April 30, 1996....................... -- $ -- 40,475 $ 40 -- $--
------- -------- ------ ------ ------ ------
------- -------- ------ ------ ------ ------
<CAPTION>
RETAINED
STOCKHOLDER ADDTL. EARNINGS
NOTE PAID-IN (ACCUM. TRANS
RECEIVABLE CAPTL. DEFICIT) ADJUST. TOTAL
----------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1992................... $-- $ 84,758 $(112,434) $ (143) $ 684
Issuance of Class A Common Stock................ (1,846) 17,395 -- -- 15,552
Amortization of deferred compensation........... -- 9 -- -- 9
Issuance of warrants............................ (154) 3,269 -- -- 3,115
Translation adjustments......................... -- -- -- 1,411 1,411
Net loss........................................ -- -- (4,246) -- (4,246)
Dividends....................................... -- -- (3,941) -- (3,941)
----------- -------- --------- ------- --------
Balance at September 30, 1993................... (2,000) 105,431 (120,621) 1,268 12,584
Conversion of Class A, C, and D Preferred Stock
and accrued dividends to Class F Preferred
Stock.......................................... -- 28,342 -- -- --
Payment on shareholder note receivable.......... 1,000 -- -- -- 1,000
Issuance of Class A Common Stock................ -- -- -- -- --
Translation adjustments......................... -- -- -- (86) (86)
Sale of international businesses................ -- -- -- (1,182) (1,182)
Net income...................................... -- -- 44,505 -- 44,505
Dividends....................................... -- -- (2,332) -- (2,332)
Quasi-reorganization:
Revaluation adjustments, net.................. -- (29,692) -- -- (29,692)
Transfer from accumulated deficit............. -- (78,448) 78,448 -- --
----------- -------- --------- ------- --------
Balance at April 30, 1994....................... (1,000) 25,633 -- -- 24,797
Redemption of Class A Common Stock.............. 1,000 (1,000) -- -- --
Issuance of Class A Common Stock................ -- -- -- -- --
Redemption of Class E Preferred Stock........... -- 135 -- -- 135
Net income...................................... -- -- 1,268 -- 1,268
Dividends....................................... -- -- (3,611) -- (3,611)
----------- -------- --------- ------- --------
Balance at April 30, 1995....................... -- 24,768 (2,343) -- 22,589
Redemption of Class A Common Stock.............. -- -- -- -- --
Issuance of warrants -- 500 -- -- 500
Conversion of Class F Preferred Stock and Senior
Preferred Stock to Class A Common Stock........ -- 138 -- -- --
Conversion of Class B Common Stock to Class A
Common Stock................................... -- -- -- -- --
Conversion of Warrants to Class A Common Stock.. -- (5) -- -- --
Issuance of Class A Common Stock................ -- 83,382 -- -- 83,391
Accrued Dividends Forgiven--Senior Preferred
Stock.......................................... -- 6,162 -- -- 6,162
Exercise of Options............................. -- 152 -- -- 152
Net income...................................... -- -- 17,247 -- 17,247
Dividends....................................... -- (2,988) -- -- (2,988)
----------- -------- --------- ------- --------
Balance at April 30, 1996....................... $-- $115,097 $ 11,916 $ -- $127,053
----------- -------- --------- ------- --------
----------- -------- --------- ------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, SEVEN MONTHS YEAR ENDED
---------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
---------- ---------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)........................................... $ 17,247 $ 1,268 $ 44,505 $ (4,246)
Adjustments:
Depreciation and amortization............................. 9,775 9,997 9,248 17,883
Provision for receivables and investments................. 14,393 95 356 5,287
Gain on sale of building.................................. -- -- -- (1,398)
Gain on disposal of discontinued businesses............... (14,594) -- (55,754) (247)
Changes in operating assets and liabilities:
Receivables............................................. (51,193) (58,354) (19,092) 53,253
Inventories............................................. (51,720) (38,900) (86,044) 2,504
Prepaid expenses and other assets....................... (2,462) (1,257) 1,505 (4,409)
Deferred income taxes................................... 10,029 (1,097) 9,710 (1,730)
Accounts payable........................................ 42,177 37,556 (19,679) (9,871)
Accrued and other liabilities........................... 4,865 1,070 (21,713) (34,890)
---------- ---------- ------------- -------------
Total adjustments..................................... (38,730) (50,890) (181,463) 26,382
---------- ---------- ------------- -------------
Net cash provided by (used in) operating activities......... (21,483) (49,622) (136,958) 22,136
Cash Flows from Investing Activities:
Sales of businesses....................................... 14,594 -- 78,401 3,097
Capital expenditures...................................... (15,583) (12,835) (3,099) (6,383)
Proceeds from sale of building............................ -- -- -- 2,939
Repayment of notes receivable............................. -- 9,722 6,213 6,327
---------- ---------- ------------- -------------
Net cash provided by (used in) investing activities......... (989) (3,113) 81,515 5,980
Cash Flows from Financing Activities:
Payments on long-term debt................................ (7,836) (12,342) (16,322) (10,120)
Borrowings under line of credit, net of payments.......... (46,999) 73,287 68,123 (33,032)
Issuance of common stock and warrants..................... 84,044 -- -- 14,740
Redemption of preferred stock and accrued dividends....... -- (4,654) -- --
Dividends paid............................................ -- (1,000) -- --
---------- ---------- ------------- -------------
Net cash provided by (used in) financing activities......... 29,209 55,291 51,801 (28,412)
Net increase (decrease) in cash............................. 6,737 2,556 (3,642) (296)
Cash at beginning of the period............................. 7,761 5,205 8,847 9,143
---------- ---------- ------------- -------------
Cash at end of the period................................... $ 14,498 $ 7,761 $ 5,205 $ 8,847
---------- ---------- ------------- -------------
---------- ---------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid (received) during the period for:
Interest................................................ $ 38,761 $ 31,352 $ 13,094 $ 24,873
Income taxes, net of refunds.............................. 625 1,424 5 (349)
Non-cash investing activities:
Equipment acquired under capital leases................... 4,293 -- -- 699
Non-cash financing activities:
Payment of accrued dividends with common stock............ -- -- -- 3,462
Conversion of accrued dividends into a note payable....... -- 2,462 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Vanstar Corporation (the "Company") is a leading provider of services and
products designed to build and manage personal computer network infrastructures
primarily for Fortune 1000 companies and other large enterprises. The Company
provides customized, integrated solutions for its customers' network
infrastructure needs by combining a comprehensive offering of value-added
services with its expertise in sourcing and distributing PC's, network products,
computer peripherals and software from a variety of vendors. The consolidated
financial statements include the accounts of Vanstar Corporation and all
subsidiaries. All significant intercompany balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Products revenue is primarily derived from the sale of computer hardware,
software, peripherals and communications devices manufactured by third parties
and sold by the Company, principally to implement integration projects. Services
revenue is derived from value-added services, including services focused on the
server and communication segments of the PC network infrastructure, services
performed for the desktop and fees earned on a distribution services agreement.
Product sales are recognized at the time of shipment. Revenue from services is
recognized as services are performed or ratably if performed over a service
contract period. Deferred revenue primarily represents unrecognized service
revenue.
CHANGE OF COMPANY NAME AND FISCAL YEAR END
The Company changed its name from "ComputerLand Corporation" to "Vanstar
Corporation," effective March 21, 1994, in conjunction with the sale of its U.S.
franchise business, including the right to the "ComputerLand" name and trademark
within the United States.
The Company also changed its fiscal year end during fiscal 1994 from
September 30 to April 30. Accordingly, the Company's transition period ending
April 30, 1994 includes only seven months from October 1, 1993 to April 30,
1994.
FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
receivables, and accounts payable approximate the respective fair values due to
the short maturities of these instruments. The long-term debt consists of
variable rate instruments at terms the Company believes would be available if
similar financing were obtained from another party. As such, carrying amounts
also approximate their fair value.
F-7
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventory for resale and spare parts inventory are stated at the lower of
cost (first-in, first-out method) or market. Periodically, the Company assesses
the appropriateness of the inventory valuations giving consideration to
obsolete, slow-moving and nonsalable inventory.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the related assets as
follows:
<TABLE>
<S> <C>
Furniture and equipment 3 to 5 years
Lesser of term of lease or useful
Leasehold improvements life
Building 25 years
</TABLE>
ACQUISITION ACCOUNTING
All acquisitions have been accounted for using the purchase method whereby
the purchase price, including liabilities assumed, is allocated based upon the
fair value of the tangible and intangible assets of the acquired entity. The
Company's consolidated statements of operations include the results of
operations of the acquired businesses subsequent to the purchase dates. Goodwill
represents the excess of cost over the net assets of acquired businesses and is
amortized using the straight-line method over twenty-five years.
The carrying amount of goodwill was adjusted to fair value at April 30, 1994
in connection with the Company's quasi-reorganization. Periodically, the Company
assesses the appropriateness of the carrying amount of goodwill and the
amortization periods based on the undiscounted value of the current and
anticipated future cash flows and projected profitability of the acquired
business. If there are indicated impairments, a write down is recorded to the
extent the carrying amount exceeds the fair value.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued two standards which
will be applicable to the Company but which the Company has not yet adopted:
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF and
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The impairment standard is not expected to have a significant
impact on the Company. The Company has not yet determined which of the
acceptable approaches it will use under the stock compensation standard.
Adoption of certain approaches under the stock compensation standard could
result in noncash charges, which if made are not expected to be material. At a
minimum, the standard will require disclosures about the fair value of the
employee stock options.
2. DISCONTINUED OPERATIONS
The Company disposed of primarily all of its worldwide franchise business
during the seven months ended April 30, 1994 and the fiscal year ended September
30, 1993. Combined revenues of the franchise segment were $0.4 billion and $1.1
billion during the seven months ended April 30, 1994 and the fiscal year ended
September 30, 1993, respectively.
F-8
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS (CONTINUED)
U.S. FRANCHISE DIVISION
On January 31, 1994, pursuant to an asset purchase agreement, the Company
sold certain assets and liabilities of its U.S. franchise business, including
all domestic franchise agreements, Datago distribution agreements and the right
to the "ComputerLand" name and trademark within the United States to Merisel
FAB, a wholly-owned subsidiary of Merisel, Inc. ("Merisel"). The purchase price
was $80.2 million in cash plus additional consideration based upon the
cumulative volume of product sold during the two-year period commencing February
1, 1994. The Company recorded a gain on the sale of $32.5 million, net of
related disposition costs and taxes during the seven-month period ended April
30, 1994. At April 30, 1995, no additional consideration was recorded based on
the inability to determine the amount of additional consideration earned, if
any.
Concurrent with the sale, the Company entered into a distribution services
agreement with Merisel FAB. Pursuant to this agreement, the Company continues to
supply product and provide certain logistics and other support services to
Merisel FAB. The Company receives a monthly distribution fee for such services.
The Company also granted Merisel FAB $20.0 million in extended, interest-bearing
credit on its product purchases.
Effective January 31, 1996, the Company and Merisel FAB signed amendments to
the asset purchase agreement and distribution services agreement. The amendments
provide that: the term of the distribution services agreement be extended
through April 30, 1997; the distribution fee be reduced retroactive to April 1,
1995; the additional consideration be fixed at $14.6 million; the maximum amount
of the extended credit be increased by $11.1 million, which will be reduced in
monthly installments from February 1996 through July 1997; and the original
amount of interest-bearing credit of $20.0 million be extended and reduced in
three equal monthly installments from May 15, 1997 through July 15, 1997.
As a result of announcements made by Merisel on February 20, 1996, the
Company decided to record a $31.1 million provision as of January 31, 1996
against its extended credit due from Merisel FAB. As of April 30, 1996 the
Company reversed a portion of such provision (see Note 15--Subsequent Events).
INTERNATIONAL SUBSIDIARIES
On April 29, 1994, the Company sold several of its international
subsidiaries which operated franchise businesses primarily in Europe, resulting
in a net gain of approximately $12.6 million. On June 28, 1993, the Company sold
the assets of a subsidiary in New Zealand for approximately $2.2 million and
recognized a gain of $0.3 million.
3. QUASI-REORGANIZATION
Effective April 30, 1994, and in connection with the Company's decision to
dispose of its franchise business, the Company elected to adjust its balance
sheet in accordance with quasi-reorganization accounting principles. A
quasi-reorganization is an elective accounting procedure intended to restate
assets and liabilities to fair values and eliminate any deficit in retained
earnings. The accumulated deficit at April 30, 1994 of $78.4 million was
eliminated against additional paid-in capital. The adjustments to fair value
included $22.7 million of non-cash write-downs of goodwill and other intangible
assets and the write-down of $7.0 million of property, plant and equipment.
Management utilized the services of outside experts in determining the fair
values. The carrying values of all other assets and liabilities at April 30,
1994 were determined to approximate their fair values and no further adjustment
to the historical basis was
F-9
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. QUASI-REORGANIZATION (CONTINUED)
required. Management believes that those adjustments reflected the significant
changes in the evolution of the Company and provided a more appropriate basis to
report future operating results.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Inventory for resale.................................................. $ 348,419 $ 296,458
Less reserve for obsolete inventory................................... (12,640) (11,435)
---------- ----------
335,779 285,023
Spare parts (current)................................................. 14,627 13,663
---------- ----------
$ 350,406 $ 298,686
---------- ----------
---------- ----------
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment................................................. $ 57,093 $ 46,609
Building and improvements............................................... 14,377 13,707
--------- ---------
71,470 60,316
--------- ---------
Less accumulated depreciation and amortization.......................... (48,287) (40,484)
--------- ---------
$ 23,183 $ 19,832
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization associated with property and equipment was
$7.7 million, $8.3 million, $7.3 million, and $13.9 million for the fiscal years
ended April 30, 1996 and 1995, the seven months ended April 30, 1994 and the
year ended September 30, 1993.
F-10
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Spare parts (non-current)............................................... $ 28,883 $ 27,324
Capitalized software, net............................................... 13,353 4,974
Deferred income taxes................................................... 5,593 5,593
Other................................................................... 1,070 1,405
--------- ---------
$ 48,899 $ 39,296
--------- ---------
--------- ---------
</TABLE>
Capitalized software represents the costs associated with development of
software for the Company's internal use. Such costs are capitalized in
accordance with Statement of Financial Accounting Standards No. 86, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED,
and are amortized over the remaining useful economic life of the software of up
to five years. Accumulated amortization at April 30, 1996 and 1995 was $0.3 and
$0.0 million, respectively.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Line of Credit........................................................ $ 289,072 $ 336,071
Note to stockholder, due January 1996............................... -- 4,578
9.75% note to stockholder............................................. -- 2,463
9.25% note secured by real property, payable in monthly installments
of $26 through April 2003........................................... 1,356 1,721
Other (including obligations under capital leases).................... 4,338 602
---------- ----------
Total Outstanding Debt................................................ $ 294,766 $ 345,435
Less current maturities............................................... (1,759) (7,685)
---------- ----------
$ 293,007 $ 337,750
---------- ----------
---------- ----------
</TABLE>
The line of credit consists of amounts borrowed under a financing agreement
with IBM Credit Corporation ("IBMCC"), an affiliate of one of the Company's
principal vendors. The line of credit is established for $450 million, is
renewable every six months, is secured by portions of the Company's inventory,
accounts receivable and certain other assets and is terminable by the Company or
IBMCC at anytime upon 90 days' written notice. In the event of such termination,
the outstanding borrowings are not due until the end of the term, currently
expiring on October 31, 1997. The financing agreement contains various terms and
covenants which require the Company to maintain certain levels of tangible net
worth and certain other financial restrictions. The financing agreement also
limits the Company's ability to pay cash dividends on its Common Stock. At April
30, 1996, the Company had $386 million outstanding under this facility of which
$97 million is included in accounts payable and $289 million is classified as
long-term debt. The interest rate was prime plus 2.0% through March 31, 1995,
and prime plus 1.06% from April 1,
F-11
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
1995 to March 31, 1996, prime plus 0.45% from April 1, 1996 to April 30, 1996
and prime minus 0.50% thereafter.
Aggregate maturities of long-term debt, excluding the line of credit, are
approximately $1.7 million, $1.7 million, $1.2 million, and $0.3 million,
respectively each of the succeeding four years, and $0.8 million thereafter.
8. CONCENTRATION OF CREDIT RISK
The Company purchases multi-vendor PC products for sale primarily to
end-users and to customers of Merisel FAB, and provides various PC-related
services. Although receivables from end-users are uncollateralized, the credit
risk is limited due to the large number and diversity of customers comprising
the Company's customer base. During fiscal 1993 and the seven months ended April
30, 1994, no individual customer accounted for more than 10% of the Company's
total revenue. During fiscal year 1996 and 1995, Microsoft Corporation accounted
for 12.0%, and 10.8%, respectively, of the Company's total revenue.
9. LEASE COMMITMENTS
The Company leases certain administrative, warehousing and other facilities
under operating leases and equipment under a combination of operating and
capital leases. Most of the Company's operating leases are subject to annual
escalation clauses ranging from two to five percent. Several facilities under
operating leases have been sublet. The future minimum lease payments on
noncancelable operating leases with an initial term in excess of one year and
future sublease income under noncancelable subleases as of April 30, 1996 are as
follows:
<TABLE>
<CAPTION>
MINIMUM LEASE SUBLEASE
PAYMENT INCOME
-------------- -----------
(IN THOUSANDS)
<S> <C> <C>
1997................................................................ $ 12,251 $ 820
1998................................................................ 7,714 348
1999................................................................ 4,234 43
2000................................................................ 1,158 --
2001................................................................ 540 --
Thereafter.......................................................... 939 --
------- -----------
$ 26,836 $ 1,211
------- -----------
------- -----------
</TABLE>
In connection with leases on facilities associated with acquisitions, the
Company established reserves for future lease payments on certain duplicate or
excess facilities. The balance of these reserves at April 30, 1996 was
approximately $2.8 million, which has not reduced the amounts shown above.
Rental expense, under operating leases, charged to operations was $13.8
million, $14.2 million, $8.7 million and $15.2 million during fiscal year ended
April 30, 1996 and 1995, the seven month period ended April 30, 1994 and the
fiscal year ended 1993, respectively.
The cost of assets recorded under capital leases was $4.5 million and $3.3
million at April 30, 1996 and 1995, respectively. Accumulated amortization on
such assets was $0.5 million and $2.8 million at April 30, 1996 and 1995,
respectively. The present value of minimum lease payments under capital leases
as of April 30, 1996 was $4.1 million.
F-12
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On March 11, 1996, the Company completed an initial public offering selling
8,000,000 shares of its Common Stock. In connection with the initial public
offering, the Company granted to the Underwriters a 30-day option to purchase up
to an additional 2,215,770 shares of Common Stock solely to cover over-
allotments, if any. The Underwriters exercised their option to purchase
1,215,770 of such shares in April 1996.
PREFERRED STOCK, COMMON STOCK AND WARRANTS
Concurrent with the consummation of the initial public offering, all
outstanding shares of Senior Preferred Stock, Class F Preferred Stock and Class
B Common Stock were converted into 19,018,088 shares of Common Stock.
Additionally, all outstanding warrants were exchanged for 4,995,691 shares of
Common Stock, all accrued dividends payable to the holder of the Senior
Preferred Stock totaling $6.2 million were forgiven and all such stock and
warrants converted to Common Stock were canceled.
As of April 30, 1996, 15,000,000 shares of undesignated Preferred Stock,
$0.01 par value are authorized; no shares of this newly authorized class have
been issued.
At April 30, 1996, the Company had 6,000,000 shares of Common Stock reserved
for future issuance for the Company's stock option and stock purchase plans and
29,800 shares of Common Stock reserved for future issuance upon the exercise of
options granted to certain of the Company's former franchisees.
STOCK OPTION PLANS
The Company has two stock option plans which provide for the issuance of
incentive stock options ("ISOs"), stock options that are non-qualified for
Federal income tax purposes ("NQSOs") and stock appreciation rights ("SARs").
The 1988 Stock Option Plan was adopted in July 1988 and provides for the
issuance of ISOs, NQSOs and SARs to key employees and directors. The 1993 Stock
Option Plan was adopted in April 1993 and provides for the issuance of shares of
common stock, ISOs, NQSOs or SARs to highly compensated, managerial employees,
officers and directors. The exercise price of the ISOs under both plans may not
be less than 100% of the fair market value of the Common Stock at the time of
grant. Under the 1993 plan, the exercise price of the NQSOs may not be less than
85% of the fair market value at the time of grant. At April 30, 1996, the total
number of shares of Common Stock for which options may be granted pursuant to
the 1988 and 1993 plans were 2,500,000 and 2,500,000, respectively. Under both
plans, options generally become exercisable ratably over a four or five year
period and expire in ten years. At April 30, 1996, options to purchase 1,403,034
shares were exercisable. At April 30, 1996, no SARs had been issued.
Effective as of May 1, 1995, the Company offered to all current employees
who held options, the right to exchange their options for new options that are
exercisable at a price of $3.00 per share. The new options are subject to a new
four-year vesting schedule commencing May 1, 1995. In connection with this
transaction, 1,164,505 options were exchanged.
F-13
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes option activity through April 30, 1996 under
both plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
OPTIONS EXERCISE AGGREGATE
AVAILABLE PRICE PER EXERCISE
FOR GRANT SHARES SHARE PRICE
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at September 30, 1992........................... 119,421 1,803,421 $0.18- 6.00 $ 9,627,876
Granted............................................... (61,800) 61,800 6.00 370,800
Canceled.............................................. 128,390 (128,390) 5.55- 6.00 (746,118)
Expired............................................... 101,876 (101,876) 5.55- 6.00 (572,499)
------------ ----------- ------------- -------------
Balance at September 30, 1993........................... 287,887 1,634,955 0.18- 6.00 8,680,059
Increase in authorized shares......................... 429,800 -- -- --
Granted............................................... (12,500) 12,500 6.00 75,000
Exercised............................................. -- (74,380) 0.18 (13,388)
Canceled.............................................. 22,324 (22,324) 5.55- 6.00 (130,536)
Expired............................................... 132,822 (132,822) 5.55- 6.00 (745,459)
------------ ----------- ------------- -------------
Balance at April 30, 1994............................... 860,333 1,417,929 0.18- 6.00 7,865,676
Granted............................................... (883,726) 883,726 6.00 5,302,356
Canceled.............................................. 69,964 (69,964) 5.55- 6.00 (417,775)
Expired............................................... 70,147 (70,147) 5.55- 6.00 (413,278)
------------ ----------- ------------- -------------
Balance at April 30, 1995............................... 116,718 2,161,544 0.18- 6.00 12,336,979
Increase in authorized shares......................... 2,677,158 -- -- --
Exercised............................................. -- (26,125) 3.00- 6.00 (152,250)
Granted............................................... (2,966,943) 2,966,943 3.00-10.00 12,896,829
Canceled.............................................. 1,229,630 (1,229,630) 3.00- 6.00 (7,139,304)
Expired............................................... 55,247 (55,247) 5.55- 6.00 (315,565)
------------ ----------- ------------- -------------
Balance at April 30, 1996............................... 1,111,810 3,817,485 $0.18-10.00 $ 17,626,689
------------ ----------- ------------- -------------
------------ ----------- ------------- -------------
</TABLE>
STOCK PURCHASE PLAN
On March 11, 1996, the Company adopted an employee purchase plan (the "Stock
Purchase Plan") allowing eligible employees to purchase shares of the Company's
Common Stock. The Stock Purchase Plan is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Code. The total number of shares
of Common Stock authorized for issuance under the plan is 1,000,000. All
full-time employees of the Company are eligible to participate, subject to
certain limited exceptions. The Stock Purchase Plan provides a means for the
Company's employees to purchase stock through payroll deductions of up to 10% of
their gross compensation. The purchase price for shares offered under the Stock
Purchase Plan is equal to 85% of the lower of the closing price of the Common
Stock on the first day of the six month offer period or the last day of the six
month offer period. The initial offer period is from March 11, 1996 to August
31, 1996. At April 30, 1996, no shares were issued to employees participating in
the plan.
F-14
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS
The Company provides a savings plan under Section 401(k) of the Internal
Revenue Code to substantially all domestic employees who are over the age of 21.
Employees can contribute up to 12% of their annual salary to the plan up to a
maximum allowed by the Internal Revenue Code. The Company will match 100% of the
employee's contributions up to $200 not to exceed the maximum of 1% of the
employee's eligible compensation. If the employee contributes more than $200 to
the plan, the Company will contribute an amount equal to the greater of $200 or
25% of the employee's contribution up to a maximum of 1% of the employee's
eligible compensation. The amount charged to expense for the matching
contribution was $0.7 million, $0.7 million, $0.5 million, and $0.7 million for
the fiscal years ended April 30, 1996 and 1995, the seven month period ended
April 30, 1994, and the year ended September 30, 1993, respectively.
12. INCOME TAXES
The income tax benefit (provision) computed under Statement of Financial
Accounting Standards No. 109, consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
APRIL 30, SEVEN MONTHS FISCAL YEAR
--------------------- ENDED APRIL ENDED SEPTEMBER
1996 1995 30, 1994 30, 1993
---------- --------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Federal...................................................... $ -- $ -- $ (500) $ --
State........................................................ (100) (200) (500) --
Foreign...................................................... -- -- -- (260)
---------- --------- ------------- -----
(100) (200) (1,000) (260)
---------- --------- ------------- -----
Deferred:
Federal...................................................... (8,561) (562) (7,631) 190
State........................................................ (1,468) (119) (1,122) --
---------- --------- ------------- -----
(10,029) (681) (8,753) 190
---------- --------- ------------- -----
Total gross margin....................................... $ (10,129) $ (881) $ (9,753) $ (70)
---------- --------- ------------- -----
---------- --------- ------------- -----
</TABLE>
The income tax benefit (provision) is allocated between discontinued and
continuing operations as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
--------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
---------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Provision allocated to operations of discontinued businesses
and income on disposal of discontinued business.............. $ (5,400) $ -- $ (14,399) $ (6,811)
---------- --------- ------------- -------------
---------- --------- ------------- -------------
Income tax benefit (provision) allocated to continuing
operations................................................... $ (4,729) $ (881) $ 4,646 $ 6,741
---------- --------- ------------- -------------
---------- --------- ------------- -------------
</TABLE>
F-15
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Significant components of deferred tax liabilities and assets consist of the
following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Capital leases...................................................... $ -- $ 91
Other............................................................... -- 106
---------- ----------
Total deferred tax liabilities.................................... -- 197
---------- ----------
Deferred tax assets:
Reserves............................................................ 8,220 9,504
Inventory reserves.................................................. 6,446 9,441
Other expenses, not currently deductible............................ 2,751 6,454
Net operating loss carryforward..................................... 13,926 10,381
Other............................................................... -- 5,789
---------- ----------
Total deferred tax assets......................................... 31,343 41,569
---------- ----------
Total net deferred tax assets......................................... $ 31,343 $ 41,372
---------- ----------
---------- ----------
</TABLE>
The net operating loss carryforwards listed above expire in the years 2000
through 2010.
Realization of the total net deferred tax assets is dependent on generating
future taxable income. The full realization of the $31.3 million of deferred tax
assets carried at April 30, 1996 is dependent upon the Company achieving future
pretax earnings, prior to the expiration of the net operating loss
carryforwards, of $84.7 million. Although realization is not assured, Management
believes that sufficient taxable income will be generated through operations to
realize the net deferred tax assets. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
Income before income taxes from foreign operations was $0.0 million, $0.0
million, $0.9 million and, $3.4 million for fiscal years ended April 30, 1996
and 1995, the seven months ended April 30, 1994, and the fiscal year ended
September 30, 1993, respectively.
A reconciliation of the U.S. statutory income tax rate and the effective
rate of the income tax benefit (provision) allocated to continuing operations is
as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
-------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
--------- --------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Statutory tax rate at 35% (34% for 1993)........................ $ (4,473) $ (752) $ 4,065 $ 8,667
State income taxes, net of federal benefit...................... (536) (108) 210 725
Losses not benefited............................................ -- -- -- (2,736)
Other........................................................... 280 (21) 371 85
--------- --------- ------ ------
$ (4,729) $ (881) $ 4,646 $ 6,741
--------- --------- ------ ------
--------- --------- ------ ------
</TABLE>
F-16
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
Pro forma net income per share and shares used in per share calculation for
fiscal year 1996 and 1995 have been presented on the consolidated statements of
income as if the conversion of the Company's preferred stock and warrants had
occurred at the later of the beginning of fiscal year 1995 or the issuance date.
Both pro forma and historical income (loss) per share is computed using the
weighted average number of shares of Common Stock and dilutive common stock
equivalents outstanding during the period. Common stock equivalents are computed
on the preferred stock using the if-converted method and on the outstanding
options using the treasury stock method. During the fiscal years ended 1995 and
1993 the effect upon the historical income (loss) per share of common stock
equivalents was antidilutive and is therefore excluded from the calculations.
Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock equivalents also include amounts computed on options and warrants
issued within twelve months of the filing date as if they were outstanding for
all periods presented using the treasury stock method and the initial public
offering price.
The following is a summary of the historical income (loss) per common and
common equivalent share and historical shares used in per share calculation:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR
APRIL 30, SEVEN MONTHS ENDED
-------------------- ENDED APRIL SEPTEMBER 30,
1996 1995 30, 1994 1993
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Historical income (loss) per share:
Continuing operations...................................... $ 0.27 $ (0.17) $ (0.24 ) $ (1.89 )
Discontinued operations.................................... 0.30 -- 1.76 1.21
--------- --------- ------------- -------------
Total historical income (loss) per share..................... $ 0.57 $ (0.17) $ 1.52 $ (0.68 )
--------- --------- ------------- -------------
--------- --------- ------------- -------------
Weighted average number of shares
(in thousands):
Common stock............................................... 14,247 11,040 11,168 9,282
Common stock equivalents................................... 15,974 2,671 18,053 2,671
--------- --------- ------------- -------------
Historical shares used in per share calculation.............. 30,221 13,711 29,221 11,953
--------- --------- ------------- -------------
--------- --------- ------------- -------------
</TABLE>
14. LITIGATION AND CONTINGENCIES
Various legal actions arising in the normal course of business have been
brought against the Company and certain of its subsidiaries. Management believes
that the ultimate resolution of these actions will not have a material adverse
effect on the Company's financial position or results of operations, taken as a
whole.
15. SUBSEQUENT EVENTS
Effective May 24, 1996, the Company, through a wholly-owned subsidiary,
acquired certain of the assets and assumed certain of the liabilities of
Dataflex Corporation and of Dataflex's wholly-owned subsidiary, Dataflex
Southwest Corporation. The assets acquired and liabilities assumed comprise
substantially all of the assets and liabilities previously associated with the
business operations of Dataflex known as the Dataflex Western Region and
Dataflex Southwest Region. The two Dataflex regions offer PC product
F-17
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (CONTINUED)
distribution, service and support in the states of Arizona, California,
Colorado, New Mexico, Nevada and Utah and reported revenues of approximately
$145 million for the fiscal year ended March 31, 1996. The purchase price of the
assets and businesses acquired from Dataflex was approximately $42.0 million,
subject to certain post-closing adjustments. Of this amount, the Company paid
approximately $37.0 million in cash on May 29, 1996, with the remainder due
following the completion of an audit of the assets acquired and the liabilities
assumed as of May 31, 1996 and the completion of certain other post closing
matters.
On May 29, 1996, the Company entered into an agreement with a third party
under which the Company received $15.6 million in cash in exchange for providing
the third party the right to receive payments in May, June and July 1997
totaling $20.0 million out of amounts collected from the extended credit owed to
the Company by Merisel FAB. As a result of the agreement, the Company adjusted a
portion of the reserve on its extended credit from Merisel FAB resulting in
additional pre-tax income of $15.6 million during the quarter ended April 30,
1996.
On June 5, 1996, the Company entered into an agreement to acquire Mentor
Technologies LTD, ("Mentor"), an Ohio limited partnership providing information
technology training and education. Mentor reported revenues of approximately
$5.5 million for the year ended December 31, 1995. The Company anticipates
accounting for the acquisition as a "pooling of interests" as defined by
Accounting Principals Board Opinion No. 16., BUSINESS COMBINATIONS. Consummation
of the transaction is subject to certain closing conditions and compliance with
applicable law.
F-18
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1996 1996
----------- ----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash................................................................................... $ 12,090 $ 14,498
Receivables, net of allowance for doubtful accounts of $10,386 at October 31, 1996, and
$14,812 at April 30, 1996............................................................ 302,024 298,484
Inventories............................................................................ 380,976 350,406
Deferred income taxes.................................................................. 13,511 25,750
Prepaid expenses and other current assets.............................................. 6,933 2,432
----------- ----------
Total current assets................................................................. 715,534 691,570
Property and equipment, net.............................................................. 25,226 23,183
Other assets, net........................................................................ 50,340 48,899
Goodwill, net of accumulated amortization of $4,541 at October 31, 1996, and $3,453 at
April 30, 1996......................................................................... 52,158 39,713
----------- ----------
$ 843,258 $ 803,365
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................................... $ 299,038 $ 305,374
Accrued liabilities.................................................................... 41,679 41,586
Deferred revenue....................................................................... 25,469 27,109
Current maturities of long-term debt................................................... 2,365 1,759
Short-term borrowings.................................................................. 115,625 --
----------- ----------
Total current liabilities............................................................ 484,176 375,828
Long-term debt, less current maturities.................................................. 3,337 293,007
Other long-term liabilities.............................................................. 5,835 7,477
Commitments and contingencies............................................................ -- --
Company-obligated mandatorily redeemable convertible preferred securities of subsidiary
trust holding solely convertible subordinated debt securities of the Company (1)....... 194,561 --
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 100,000,000 shares authorized, 41,465,250 shares issued
and outstanding at October 31, 1996, 40,475,144 shares issued and outstanding at
April 30, 1996....................................................................... 41 40
Additional paid-in capital............................................................. 122,552 115,097
Retained earnings...................................................................... 32,756 11,916
----------- ----------
Total stockholders' equity........................................................... 155,349 127,053
----------- ----------
$ 843,258 $ 803,365
----------- ----------
----------- ----------
</TABLE>
- ------------------------
(1) The sole asset of the Trust is $207,474,200 aggregate principal amount of
the Company's 6 3/4% Convertible Subordinated Debentures due 2016.
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED OCTOBER
31,
------------------------
1996 1995
------------ ----------
<S> <C> <C>
(UNAUDITED)
Revenue:
Product............................................................................... $ 953,122 $ 763,113
Services.............................................................................. 149,701 109,184
------------ ----------
Total revenue....................................................................... 1,102,823 872,297
Cost of revenue:
Product............................................................................... 858,209 692,316
Services.............................................................................. 85,211 58,734
------------ ----------
Total cost of revenue............................................................... 943,420 751,050
------------ ----------
Gross margin............................................................................ 159,403 121,247
Selling, general and administrative expenses............................................ 116,237 93,134
------------ ----------
Operating income........................................................................ 43,166 28,113
Interest income....................................................................... 1,776 2,900
Interest expense...................................................................... (10,864) (17,894)
------------ ----------
Income before income taxes and distributions on preferred securities of trust........... 34,078 13,119
Income tax provision.................................................................. (12,609) (4,854)
Distributions on convertible preferred securities of trust, net of tax (See Note 3)... (629) --
------------ ----------
Net income.............................................................................. $ 20,840 $ 8,265
------------ ----------
------------ ----------
Primary and fully diluted earnings per share (pro forma prior to March 11, 1996--See
Note 2)............................................................................... $ 0.49 $ 0.25
------------ ----------
------------ ----------
Shares used in per share calculation.................................................... 42,440 33,029
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
--------------------------
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 20,840 $ 8,265
Adjustments:
Depreciation and amortization................... 7,821 4,722
Change in provision for doubtful accounts....... (2,707) 1,294
Changes in operating assets and liabilities:
Receivables................................... 25,002 3,031
Inventories................................... (24,114) (48,510)
Prepaid expenses and other assets............. (4,033) (265)
Deferred income taxes......................... 12,239 4,754
Accounts payable.............................. (13,682) 11,334
Accrued and other liabilities................. (5,919) 1,842
------------ ------------
Total adjustments........................... (5,393) (21,798)
------------ ------------
Net cash provided by (used in) operating
activities........................................ 15,447 (13,533)
Cash flows from investing activities:
Repayment of notes receivable..................... -- 4,496
Capital expenditures.............................. (7,159) (9,578)
Proceeds from sale of building.................... 3,125 --
Purchase of business, net of cash acquired........ (35,633) --
------------ ------------
Net cash used in investing activities............... (39,667) (5,082)
Cash flows from financing activities:
Payments on long-term debt........................ (3,264) (384)
Borrowings under line of credit, net of
payments........................................ (173,581) 15,174
Proceeds from issuance of convertible preferred
securities of trust, net........................ 194,561 --
Issuance of common stock and warrants............. 4,096 500
------------ ------------
Net cash provided by financing activities........... 21,812 15,290
------------ ------------
Net decrease in cash................................ (2,408) (3,325)
Cash at beginning of the period................... 14,498 7,761
------------ ------------
Cash at end of the period........................... $ 12,090 $ 4,436
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The financial statements for Vanstar Corporation (the "Company") for the six
months ended October 31, 1996 and October 31, 1995 are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities and Exchange Commission regulations. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements reflect all adjustments (of a normal and
recurring nature) which are necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1996. The results of
operations for the six months ended October 31, 1996 are not necessarily
indicative of the results to be expected for the entire fiscal year.
2. EARNINGS PER SHARE
Earnings per share and shares used in per share calculation for periods
prior to March 11, 1996, the date of the Company's initial public offering, have
been presented on the consolidated statements of income as if the conversion of
the Company's preferred stock and warrants had occurred at the later of the
beginning of the period or the issuance date.
Primary and fully diluted earnings per share is computed using the weighted
average number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents are computed for the
Company's outstanding options using the treasury stock method. Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common stock
equivalents also include amounts computed on options and warrants issued during
the twelve months immediately preceding the date of the initial filing of the
Company's Registration Statement on Form S-1 relating to the Company's initial
public offering as if they were outstanding for all periods prior to the closing
on March 11, 1996 (using the treasury stock method and the initial public
offering price of $10.00).
3. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY
TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT SECURITIES OF THE COMPANY
On October 2, 1996, Vanstar Financing Trust, a Delaware statutory business
trust (the "Trust") issued and sold 3,500,000 6 3/4% Trust Convertible Preferred
Securities (the "Convertible Preferred Securities") in transactions exempt or
excluded from the registration requirements of the Securities Act of 1933, as
amended. On October 28, 1996, an additional 525,000 of the Convertible Preferred
Securities were sold to the same initial purchasers pursuant to the exercise of
an over-allotment option granted to such purchasers in connection with the
October 2, 1996 transaction. The Company owns all of the common securities
issued by the Trust. The sole asset of the Trust is $207,474,200 aggregate
principal amount of the Company's 6 3/4% Subordinated Debentures due 2016 (the
"Debentures").
The Convertible Preferred Securities sold for and have a liquidation value
of $50 per security and are convertible at any time at the option of the holder
into shares of the Company's Common Stock at a conversion rate of 1.739 shares
for each Convertible Preferred Security (equivalent to a conversion price of
$28.75 per share of the Company's Common Stock), subject to adjustment in
certain circumstances. Distributions on the Convertible Preferred Securities
accrue at an annual rate of 6 3/4% of the liquidation value of $50 per
Convertible Preferred Security and are included in "Distributions on convertible
preferred securities of trust, net of tax" in the consolidated statements of
income. The proceeds of the October
F-22
<PAGE>
VANSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY
TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT SECURITIES OF THE COMPANY
(CONTINUED)
issuances, which totaled $194.5 million (net of initial purchasers' discounts
and estimated offering expenses totaling $6.7 million) are included in
"Company-obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible subordinated debt securities of the
Company" in the consolidated balance sheet. The Company guaranteed, on a
subordinated basis (the "Guarantee"), payment of (i) the distributions on the
Convertible Preferred Securities, (ii) the amount payable upon redemption of the
Convertible Preferred Securities, and (iii) the liquidation amount of the
Convertible Preferred Securities. The Guarantee will apply to payment of
distributions, redemptions and liquidations if and only to the extent the Trust
has funds sufficient to make such payments. Considered together, the Guarantee
provides a full and unconditional guarantee by the Company of the Convertible
Preferred Securities.
The Debentures bear interest at 6 3/4% per annum payable quarterly on
January 1, April 1, July 1 and October 1. The Debentures are redeemable by the
Company, in whole or in part, on or after October 5, 1999 at designated
redemption prices. If the Company redeems the Debentures, the Trust must redeem
the Convertible Preferred Securities on a pro rata basis having an aggregate
liquidation value equal to the aggregate principal amount of the Debentures
redeemed. The Debentures and related income statement effects are eliminated in
the Company's consolidated financial statements. The Company used the proceeds
from the issuance of the Debentures to repay a portion of amounts owed under its
Financing Program Agreement with IBM Credit Corporation ("IBMCC").
4. COMMITMENTS AND CONTINGENCIES
Various legal actions arising in the normal course of business have been
brought against the Company and certain of its subsidiaries. Management believes
that the ultimate resolution of these actions will not have a material adverse
effect on the Company's financial position or results of operations, taken as a
whole.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THEIR
AGENTS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995...... 2
Summary........................................ 3
Risk Factors................................... 6
The Company.................................... 13
Market Prices and Dividend Policy.............. 14
Capitalization................................. 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 27
Recent Developments............................ 36
Management..................................... 39
Security Ownership of Principal Stockholders
and Management................................ 48
Certain Transactions........................... 51
Description of Capital Stock................... 52
Selling Stockholders........................... 54
Plan of Distribution........................... 55
Legal Matters.................................. 57
Experts........................................ 57
Index to Consolidated Financial Statements..... F-1
</TABLE>
1,132,491 SHARES
OF
VANSTAR CORPORATION
COMMON STOCK
[LOGO]
---------------------
PROSPECTUS
---------------------
DATED , 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Securities and Exchange Commission and NASD registration fees.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............................. $ 5,299
NASD filing fee........................................................... 2,375
Accounting fees and expenses..............................................
Legal fees and expenses (exclusive of Blue Sky)...........................
Printing and engraving expenses...........................................
Transfer agent fees and expenses..........................................
Blue Sky fees and expenses................................................
NYSE Listing fee..........................................................
Miscellaneous.............................................................
---------
Total................................................................... $
---------
---------
</TABLE>
The Company will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law (the
"DGCL"), Article VI of the Registrant's Restated Certificate of Incorporation
(the "Certificate of Incorporation") eliminates the liability of the
Registrant's directors to the Registrant or its stockholders, except for
liabilities related to breach of duty of loyalty, actions not in good faith and
certain other liabilities.
Section 145 of the DGCL provides for indemnification by the Registrant of
its directors and officers. In addition, Article IX, Section 1 of the
Registrant's Restated By-Laws (the "By-laws") requires the Registrant to
indemnify any current or former director or officer to the fullest extent
permitted by the DGCL. In addition, the Registrant has entered into indemnity
agreements with its directors which obligate the Registrant to indemnify such
directors to the fullest extent permitted by the DGCL. The Registrant has also
obtained officers and directors liability insurance which insures against
liabilities that officers and directors of the Registrant may incur in such
capacities.
The Selling Stockholders will be indemnified by the Company against certain
civil liabilities, including certain liabilities under the Securities Act or
will be entitled to contribution in connection therewith. The Company will be
indemnified by the Selling Stockholders severally against certain civil
liabilities, including certain liabilities under the Securities Act or will be
entitled to contribution in connection therewith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 31, 1993, the Company has sold the following unregistered
securities:
1. In May 1995, the Company issued and sold a warrant to purchase 2,000,000
shares of Common Stock at an exercise price of $5.00 per share for an aggregate
purchase price of $500,000. In connection with the Company's initial public
offering, the holder of that portion of such warrant representing the right to
acquire 1,945,739 shares of Common Stock has foregone the right to acquire
523,096 shares under such warrant and has waived certain registration rights in
exchange for the Company's issuing 1,562,643 shares of Common Stock to such
holder.
II-1
<PAGE>
2. In December 1995 and February 1996, the Company issued an aggregate of
25,225 shares of Common Stock to former employees who had exercised options for
an aggregate exercise price of $149,650.
3. In October 1996, the Company issued $180,412,350 of its 634% Convertible
Subordinated Debentures Due 2016 to the Trust in connection with the Offering of
Preferred Securities.
4. In November 1996, the Company issued $27,061,850 of its 634% Convertible
Subordinated Debentures Due 2016 to the Trust in connection with the
over-allotment option granted the Initial Purchasers as part of the Offering of
Preferred Securities.
5. In December 1996, the Company issued 952,491 shares of Company Common
Stock in connection with the CDS Merger.
6. In January 1997, the Company issued 180,000 shares of Company Common
Stock in connection with the acquisition of assets from DCT.
7. The Company has issued an aggregate of 100,505 shares of Common Stock
pursuant to the exercise of stock options granted under the Company's stock
option plans, at a weighted average exercise price of approximately $1.65 per
share, on an unregistered basis since December 31, 1993.
All transactions described above were effected in reliance upon the
exemption from the registration requirements of the Securities Act contained in
Section 4(2) of the Securities Act or Rule 701 promulgated thereunder. In
connection with each of these transactions, the securities were sold to a
limited number of persons, such persons were provided access to all relevant
information regarding the Company and/or represented to the Company that they
were "sophisticated" investors, and such persons represented to the Company that
the securities were purchased for investment purposes only and with no view
toward distribution.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following is a list of all exhibits filed as part of this Registration
Statement on Form S-1, including those incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- --------- ----------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant (1)
*5.1 Opinion of Arter & Hadden (including the consent of such firm) as to the legality of the Vanstar
Corporation Common Stock being registered hereby
10.1 Form of Indemnity Agreement between the Registrant 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)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S> <C>
10.5 Lease Agreement dated as of July 14, 1988, entered into between the Registrant and Rosewood
Associates (1)
10.6 Real Estate Mortgage dated as of April 6, 1978, entered into between Danners, Inc. and New England
Mutual Life Insurance Company and the subsequent Contract for Purchase of Real Estate/Offer to
Purchase Real Estate dated as of April 26, 1991, entered into between the Registrant and Cheyenne
Plaza Associates (1)
10.7 Lease Agreement dated as of December 9, 1993, entered into between the Registrant and WRC
Properties, Inc. (1)
10.8 Lease Agreement dated as of August 21, 1991, entered into among the Registrant, Lincoln Las Positas
and Patrician Associates, Inc. (1)
10.9 Standard Industrial/Commercial Single-Tenant Lease-Gross dated as of March 27, 1995, entered into
among the Registrant, Thomas G. Allan and Annie L. Henry (1)
10.10 Lease Agreement dated as of March 29, 1994, entered into between the Registrant and TMC Properties,
Inc. (1)
10.11 Lease Agreement dated as of November 1, 1991, entered into between the Registrant and ASC North
Fulton Associates Joint Venture (1)
10.12 Asset Purchase Agreement dated May 24, 1996 among the Registrant, Dataflex Corporation and Dataflex
Southwest Corporation (2)
10.13 Agreement with Donaldson Lufkin & Jenrette Securities Corporation (3)
10.14 Agreement for Purchase and Sale of Property dated June 3, 1996 entered into between the Registrant
and Duke Realty Limited Partnership (4) (incorporated by reference to Exhibit 10.13)
10.15 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.14)
10.16 Lease Agreement dated as of May 30, 1996 entered into between the Registrant and Dugan Realty,
L.L.C. (4) (incorporated by reference to Exhibit 10.15)
10.17 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.16)
10.18 Lease Amendment dated May 15, 1996 entered into between the Registrant and Rosewood Associates (4)
(incorporated by reference to Exhibit 10.17)
10.19 1988 Stock Option Plan (1) (incorporated by reference to Exhibit 4.1)
10.20 Form of Nontransferable Non-Qualified Stock Option Agreement under the 1988 Stock Option Plan of the
Registrant (1) (incorporated by reference to Exhibit 4.2)
10.21 1993 Stock Option/Stock Issuance Plan (1) (incorporated by reference to Exhibit 4.3)
10.22 Form of Stock Option Grant and Stock Purchase Agreement under the 1993 Stock Option Plan (1)
(incorporated by reference to Exhibit 4.4)
10.23 Employee Stock Purchase Plan (1) (incorporated by reference to Exhibit 4.5)
10.24 Registration Rights Agreement dated October 2, 1996 by and among the Registrant and the Initial
Purchasers (5)
10.25 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 (5) (incorporated by reference to Exhibit 4.2)
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
10.26 Indenture dated as of October 2, 1996 between Vanstar Corporation as issuer and Wilmington Trust
Company as trustee (5) (incorporated by reference to Exhibit 4.3)
10.28 1996 Stock Option/Stock Issuance Plan, as amended (5) (incorporated by reference to Exhibit 10.25)
10.29 Amendment No. 5 to Second Amended and Restated Financing Program Agreement, dated September 25, 1996
between the Registrant and IBMCC (6)
10.30 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)
10.31 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)
10.32 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)
10.33 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)
*11.1 Statement re Calculation of Earnings Per Share
21.1 List of Subsidiaries (5)
*23.1 Consent of Arter & Hadden (included as part of its opinion filed as Exhibit 5.1 hereto)
*23.2 Consent of Ernst & Young LLP, independent auditors
*24.1 Power of Attorney (included on signature page hereto)
</TABLE>
- ------------------------
* 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.
(1) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-80297) as declared effective by the Commission on
March 8, 1996.
(2) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated May 24, 1996.
(3) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated June 14, 1996.
(4) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with Registrant's Annual Report on Form 10-K for
the fiscal year ended April 30, 1996.
(5) Incorporated by reference to Exhibits with corresponding number (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.
(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 number indicated filed with
the Registrant's Current Report on Form 8-K dated December 26, 1996 and
filed with the Commission on January 10, 1997.
(B) FINANCIAL STATEMENT SCHEDULES
II-4
<PAGE>
The following financial statement schedule is included in this Registration
Statement:
II Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
ITEM 17. UNDERTAKINGS.
(a) RULE 415 OFFERING. The undersigned Registrant hereby undertakes: (1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) To include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; (iii) To include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement; (2) That, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof; (3)
To remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(h) REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification
for liabilities arising out of the Securities Act may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by each director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit it to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pleasanton, State of
California, on the 30th day of January, 1997.
<TABLE>
<S> <C> <C>
VANSTAR CORPORATION
By: /s/ WILLIAM Y. TAUSCHER
-----------------------------------------
William Y. Tauscher
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
POWER OF ATTORNEY
We, the undersigned directors and officers of VANSTAR CORPORATION, do hereby
constitute and appoint WILLIAM Y. TAUSCHER and H. CHRISTOPHER COVINGTON, or
either of them, our true and lawful attorneys and agents, to do any and all acts
and things in our name and on our behalf in our capacities as directors and
officers and to execute any and all instruments for us and in our names in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said Corporation to comply with the
Securities Act of 1933 and any rules, regulations and requirements of the
Securities and Exchange Commission, in connection with this Registration
Statement, including specifically, but without limitation, power and authority
to sign for us or any of us in our names in the capacities indicated below, any
and all amendments (including post-effective amendments) hereto; and we do
hereby ratify and confirm all that said attorneys and agents, or either of them,
shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the 30th day of January, 1997, by the
following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ WILLIAM Y. TAUSCHER
------------------------------------------- Chairman of the Board, Chief Executive Officer and
William Y. Tauscher Director (PRINCIPAL EXECUTIVE OFFICER)
/s/ JEFFREY S. RUBIN
------------------------------------------- Vice Chairman, Chief Financial Officer and Director
Jeffrey S. Rubin (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ JAY S. AMATO
------------------------------------------- President, Chief Operating Officer and Director
Jay S. Amato
/s/ JOHN W. AMERMAN
------------------------------------------- Director
John W. Amerman
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
/s/ RICHARD H. BARD
------------------------------------------- Director
Richard H. Bard
/s/ STEPHEN W. FILLO
------------------------------------------- Director
Stephen W. Fillo
/s/ STEWART K. P. GROSS
------------------------------------------- Director
Stewart K. P. Gross
/s/ WILLIAM H. JANEWAY
------------------------------------------- Director
William H. Janeway
/s/ JOHN R. OLTMAN
------------------------------------------- Director
John R. Oltman
/s/ JOHN L. VOGELSTEIN
------------------------------------------- Director
John L. Vogelstein
/s/ JOSH S. WESTON
------------------------------------------- Director
Josh S. Weston
</TABLE>
II-7
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the consolidated balance sheets of Vanstar Corporation as of
April 30, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for the years ended April 30, 1996 and 1995,
the seven month period ended April 30, 1994 and the year ended September 30,
1993, and have issued our report thereon dated June 10, 1996 (included elsewhere
in this Registration Statement on Form S-1). Our audits also included the
financial statement schedule of Vanstar Corporation listed in item 16(b). This
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
June 10, 1996
II-8
<PAGE>
VANSTAR CORPORATION
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGED
BEGINNING OF TO COSTS AND WRITE-OFFS/ BALANCE AT
PERIOD EXPENSES OTHER END OF PERIOD
------------ ----------------- ----------- -------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended September 30, 1993..................... $ 23,533 $ 5,287 $ 12,621 $ 16,199
Seven months ended April 30, 1994................. 16,199 356 2,457 14,098
Year ended April 30, 1995......................... 14,098 95 1,867 12,326
Year ended April 30, 1996......................... 12,326 $ 14,393* $ 8,407** 18,312
INVENTORY RESERVES
Year ended September 30, 1993..................... $ 23,698 $ 6,760 $ 17,564 $ 12,894
Seven months ended April 30, 1994................. 12,894 1,213 2,660 11,447
Year ended April 30, 1995......................... 11,447 5,400 5,412 11,435
Year ended April 30, 1996......................... 11,435 3,854 2,649 12,640
</TABLE>
- ------------------------
* Includes a provision for $4.4 million against the extended interest-bearing
credit and $7.8 million against the extended credit both due from Merisel
FAB (see Notes 2 and 15 to the Notes to Consolidated Financial Statements).
** Includes the write-off of $4.4 million of the extended interest-bearing
credit due from Merisel FAB.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 By-laws of the Registrant (1)
*5.1 Opinion of Arter & Hadden (including the consent of such firm) as to the legality of the Vanstar
Corporation Common Stock being registered hereby
10.1 Form of Indemnity Agreement between the Registrant and each of its directors and certain officers (1)
10.2 Second Amended and Restated Financing Program Agreement dated April 30, 1995, between the Registrant
and IBM Credit Corporation (IBMCC), as amended (1)
**10.3 Distribution and Services Agreement dated January 31, 1994, between the Registrant and Merisel FAB,
Inc., as amended (1)
10.4 Amended and Restated Registration Rights Agreement dated as of May 18, 1995, among the Registrant,
NYNEX Worldwide Services Group, Inc., Warburg, Pincus Capital Company, L.P., WP Capco, Inc., William
Y. Tauscher, Richard H. Bard and Microsoft Corporation (1)
10.5 Lease Agreement dated as of July 14, 1988, entered into between the Registrant and Rosewood
Associates (1)
10.6 Real Estate Mortgage dated as of April 6, 1978, entered into between Danners, Inc. and New England
Mutual Life Insurance Company and the subsequent Contract for Purchase of Real Estate/Offer to
Purchase Real Estate dated as of April 26, 1991, entered into between the Registrant and Cheyenne
Plaza Associates (1)
10.7 Lease Agreement dated as of December 9, 1993, entered into between the Registrant and WRC Properties,
Inc. (1)
10.8 Lease Agreement dated as of August 21, 1991, entered into among the Registrant, Lincoln Las Positas
and Patrician Associates, Inc. (1)
10.9 Standard Industrial/Commercial Single-Tenant Lease-Gross dated as of March 27, 1995, entered into
among the Registrant, Thomas G. Allan and Annie L. Henry (1)
10.10 Lease Agreement dated as of March 29, 1994, entered into between the Registrant and TMC Properties,
Inc. (1)
10.11 Lease Agreement dated as of November 1, 1991, entered into between the Registrant and ASC North
Fulton Associates Joint Venture (1)
10.12 Asset Purchase Agreement dated May 24, 1996 among the Registrant, Dataflex Corporation and Dataflex
Southwest Corporation (2)
10.13 Agreement with Donaldson Lufkin & Jenrette Securities Corporation (3)
10.14 Agreement for Purchase and Sale of Property dated June 3, 1996 entered into between the Registrant
and Duke Realty Limited Partnership (4) (incorporated by reference to Exhibit 10.13)
10.15 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.14)
10.16 Lease Agreement dated as of May 30, 1996 entered into between the Registrant and Dugan Realty, L.L.C.
(4) (incorporated by reference to Exhibit 10.15)
10.17 Lease Agreement dated as of June 3, 1996 entered into between the Registrant and Duke Realty Limited
Partnership (4) (incorporated by reference to Exhibit 10.16)
10.18 Lease Amendment dated May 15, 1996 entered into between the Registrant and Rosewood Associates (4)
(incorporated by reference to Exhibit 10.17)
10.19 1988 Stock Option Plan (1) (incorporated by reference to Exhibit 4.1)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.20 Form of Nontransferable Non-Qualified Stock Option Agreement under the 1988 Stock Option Plan of the
Registrant (1) (incorporated by reference to Exhibit 4.2)
10.21 1993 Stock Option/Stock Issuance Plan (1) (incorporated by reference to Exhibit 4.3)
10.22 Form of Stock Option Grant and Stock Purchase Agreement under the 1993 Stock Option Plan (1)
(incorporated by reference to Exhibit 4.4)
10.23 Employee Stock Purchase Plan (1) (incorporated by reference to Exhibit 4.5)
10.24 Registration Rights Agreement dated October 2, 1996 by and among the Registrant and the Initial
Purchasers (5)
10.25 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 (5) (incorporated by reference to Exhibit 4.2)
10.26 Indenture dated as of October 2, 1996 between Vanstar Corporation as issuer and Wilmington Trust
Company as trustee (5) (incorporated by reference to Exhibit 4.3)
10.28 1996 Stock Option/Stock Issuance Plan, as amended (5) (incorporated by reference to Exhibit 10.25)
10.29 Amendment No. 5 to Second Amended and Restated Financing Program Agreement, dated September 25, 1996
between the Registrant and IBMCC (6)
10.30 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)
10.31 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)
10.32 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)
10.33 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)
*11.1 Statement re Calculation of Earnings Per Share
21.1 List of Subsidiaries (5)
*23.1 Consent of Arter & Hadden (included as part of its opinion filed as Exhibit 5.1 hereto)
*23.2 Consent of Ernst & Young LLP, independent auditors
*24.1 Power of Attorney (included on signature page hereto)
</TABLE>
- ------------------------
* 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.
(1) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with Registrant's Registration Statement on Form
S-1 (Reg. No. 33-80297) as declared effective by the Commission on March 8,
1996.
(2) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated May 24, 1996.
(3) Incorporated by reference to Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated June 14, 1996.
<PAGE>
(4) Incorporated by reference to Exhibits with the corresponding number (except
as otherwise noted) filed with Registrant's Annual Report on Form 10-K for
the fiscal year ended April 30, 1996.
(5) Incorporated by reference to Exhibits with corresponding number (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.
(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 number indicated filed with
the Registrant's Current Report on Form 8-K dated December 26, 1996 and
filed with the Commission on January 10, 1997.
<PAGE>
ARTER & HADDEN
1717 Main Street, Suite 4100
Dallas, Texas 75201
Tel: (214) 761-2100
Fax: (214) 741-7139
January 29, 1997
Vanstar Corporation
5964 W. Las Positas Blvd.
Pleasanton, California 94588
Re: Offering of Shares of Common Stock of Vanstar Corporation
by Certain Stockholders Thereof
Ladies and Gentlemen:
On or about January 30, 1997, Vanstar Corporation, a Delaware corporation
(the "Company"), expects to file with the Securities and Exchange Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"). Such Registration Statement
relates to the offering (the "Offering") of up to 1,132,491 shares of common
stock, $.001 par value per share (the "Common Stock"), by certain stockholders
of the Company (the "Selling Stockholders"). This firm has acted as counsel to
you in connection with the preparation and filing of the Registration Statement
and you have requested our opinion with respect to certain legal aspects of the
Offering.
In rendering our opinion, we have examined and relied upon the original or
copies, certified to our satisfaction, of (1) the Certificate of Incorporation,
as amended, and the Bylaws, as amended, of the Company; (2) copies of
resolutions of the Board of Directors of the Company authorizing the issuance of
the shares to the Selling Stockholders; (3) the Registration Statement and the
exhibits thereto; and (4) such other documents and instruments as we have deemed
necessary. In our examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or reproduction copies. As to various questions of fact material to
this opinion, we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and upon
documents, records and instruments furnished to us by the Company, without
independent check or verification of their accuracy.
Based upon the foregoing examination and subject to the comments and
assumptions noted below, we are of the opinion that the shares of Common Stock
to be sold by the Selling Stockholders in the Offering were validly issued and
fully paid and are nonassessable.
<PAGE>
Vanstar Corporation
January 29, 1997
Page 2
This opinion is limited in all respects to the General Corporation Law of
the State of Delaware as in effect on the date thereof; however, we are not
members of the Bar of the State of Delaware and our knowledge of its General
Corporation Law is derived from a reading of the most recent compilation of
that statute available to us without consideration of any judicial or
administrative interpretations thereof.
We bring to your attention the fact that this legal opinion is an
expression of professional judgment and not a guaranty of result. This opinion
is given as of the date hereof, and we assume no obligation to update or
supplement such opinion to reflect any facts or circumstances that may hereafter
come to our attention or any changes in laws or judicial decisions that may
hereafter occur.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we have come within the category of
persons whose consent is required by Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Respectfully submitted,
ARTER & HADDEN
<PAGE>
EXHIBIT 11.1
VANSTAR CORPORATION
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31, YEAR ENDED YEAR ENDED SEVEN MONTHS YEAR ENDED
------------------------ APRIL 30, APRIL 30, ENDED APRIL SEPTEMBER 30,
1996 1995 1996 1995 30, 1994 1993
----------- ----------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CALCULATION:
Weighted average number of common shares
outstanding (Common A & B)............. 40,718 11,029 14,247 11,040 11,168 9,282
Common equivalent shares from stock
options and warrants using the treasury
stock method........................... 1,722 23 360 -- 72 --
Common equivalent shares from preferred
stock using the as-if converted method
(F & SP)............................... -- 20,306 13,169 -- 15,310 --
Common equivalent shares from stock
options and warrants related to SAB No.
83 using the treasury stock method..... -- 1,671 2,445 2,671 2,671 2,671
----------- ----------- ----------- ----------- ------------- -------------
Shares used in per share calculation..... 42,440 33,029 30,221 13,711 29,221 11,953
----------- ----------- ----------- ----------- ------------- -------------
Net income (loss)........................ $ 20,840 $ 8,265 $ 17,247 $ 1,268 $ 44,505 $ (4,246)
Preferred stock dividends................ -- -- (2,988) (3,611) (2,332) (3,941)
----------- ----------- ----------- ----------- ------------- -------------
Income (loss) applicable to common
stock.................................. $ 20,840 $ 8,265 $ 14,259 $ (2,343) $ 42,173 $ (8,187)
----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ------------- -------------
Income (loss) per share.................. $ 0.49 $ 0.25 $ 0.57 $ (0.17) $ 1.52 $ (0.68)
----------- ----------- ----------- ----------- ------------- -------------
----------- ----------- ----------- ----------- ------------- -------------
PRO FORMA CALCULATION:
Weighted average number of common shares
outstanding............................ 12,107 11,040
Common equivalent shares from stock
options using the treasury stock
method................................. 310 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
----------- -----------
Pro forma shares used in computing net
income per share....................... 34,251 32,486
----------- -----------
----------- -----------
Net income............................... $ 17,247 $ 1,268
----------- -----------
----------- -----------
Pro forma net income per share........... $ 0.50 $ 0.04
----------- -----------
----------- -----------
</TABLE>
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated June 10, 1996, in the Registration Statement (Form
S-1) and related Prospectus of Vanstar Corporation dated January 30, 1997.
/s/ Ernst & Young LLP
San Jose, California
January 30, 1997
