<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
October 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____to
Commission file number 1-14192
- --------------------------------------------------------------------------------
VANSTAR CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
DELAWARE 94-2376431
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2575 Westside Parkway, Suite 500
Alpharetta, Georgia 30004
(Address of Principal Executive Offices)
(770) 619-6000
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
1100 Abernathy Road, Building 500, Suite 1200
Atlanta, Georgia 30328
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of outstanding shares of the Registrant's Common Stock, par
value $.001 per share, was 43,781,700 on November 30, 1998.
Page 1 of 38
Exhibit Index on page 25
<PAGE> 2
VANSTAR CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
------
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of October 31, 1998
and April 30, 1998 3
Consolidated Statements of Income for the Three and
Six Months Ended October 31, 1998 and 1997 4
Consolidated Statement of Stockholders' Equity for the
Six Months Ended October 31, 1998 5
Consolidated Statements of Cash Flows for the Six
Months Ended October 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Uses of Proceeds 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VANSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1998
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash $ 11,112 $ 9,476
Receivables, net of allowance for doubtful accounts of
$9,100 at October 31, 1998 and $8,262 at April 30, 1998 289,174 354,171
Inventories 231,726 470,474
Deferred income taxes 17,187 17,387
Prepaid expenses and other current assets 13,914 14,304
----------- -----------
Total current assets 563,113 865,812
Property and equipment, net 51,572 53,303
Other assets, net 63,010 81,272
Goodwill, net of accumulated amortization of $12,750 at October 31,
1998 and $10,113 at April 30, 1998 103,987 106,796
----------- -----------
$ 781,682 $ 1,107,183
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 165,476 $ 290,187
Accrued liabilities 50,399 63,590
Deferred revenue 41,032 33,288
Short-term borrowings 164,644 308,351
Current maturities of long-term debt 4,057 5,800
----------- -----------
Total current liabilities 425,608 701,216
Long-term debt, less current maturities 581 2,337
Other long-term liabilities 1,230 943
Commitments and contingencies
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,915 194,739
Stockholders' equity:
Common stock, $.001 par value: 100,000,000 shares authorized,
43,776,950 shares issued and outstanding at October 31, 1998,
43,489,030 shares issued and outstanding at April 30, 1998 44 43
Additional paid-in capital 134,702 132,703
Retained earnings (since a deficit elimination of $78,448
at April 30, 1994) 27,264 75,576
Accumulated other comprehensive (loss) (2,662) (374)
----------- -----------
Total stockholders' equity 159,348 207,948
----------- -----------
$ 781,682 $ 1,107,183
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------------------- -------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Acquisition services $ 481,500 $ 624,899 $ 1,019,307 $ 1,206,148
Other services 121,895 116,850 239,250 216,235
----------- ----------- ----------- -----------
Total revenue 603,395 741,749 1,258,557 1,422,383
----------- ----------- ----------- -----------
Cost of revenue:
Acquisition services 444,039 566,068 933,461 1,090,713
Other services 70,372 70,027 144,347 133,438
----------- ----------- ----------- -----------
Total cost of revenue 514,411 636,095 1,077,808 1,224,151
----------- ----------- ----------- -----------
Gross margin 88,984 105,654 180,749 198,232
Selling, general and administrative expenses 110,185 79,701 205,086 153,159
Restructuring charges 12,009 -- 12,009 --
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (33,210) 25,953 (36,346) 45,073
Interest income 174 336 296 740
Financing expense, net (7,032) (8,277) (16,846) (14,069)
----------- ----------- ----------- -----------
Income (loss) from operations before income
taxes and distributions on preferred
securities of Trust (40,068) 18,012 (52,896) 31,744
Income tax benefit (provision) 4,424 (6,484) 9,042 (11,428)
----------- ----------- ----------- -----------
Income (loss) from operations before
distributions on preferred securities of
Trust (35,644) 11,528 (43,854) 20,316
Distributions on convertible preferred securities
of Trust, net of income taxes (2,229) (2,228) (4,458) (4,456)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (37,873) $ 9,300 $ (48,312) $ 15,860
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE:
Basic $ (0.87) $ 0.22 $ (1.11) $ 0.37
=========== =========== =========== ===========
Diluted $ (0.87) $ 0.21 $ (1.11) $ 0.36
=========== =========== =========== ===========
COMMON SHARES AND EQUIVALENTS OUTSTANDING:
Basic 43,692 43,154 43,604 43,037
=========== =========== =========== ===========
Diluted 43,692 44,530 43,604 44,288
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
VANSTAR CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------------ PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30, 1998 43,489 $ 43 $ 132,703 $ 75,576 $ (374) $ 207,948
Comprehensive income (loss):
Net (loss) -- -- -- (48,312) -- (48,312)
Other comprehensive income
(loss) net of income tax:
Unrealized gain (loss) on
available-for-sale securities -- -- -- -- (2,311) (2,311)
Foreign currency translation
adjustment -- -- -- -- 23 23
---------
Other comprehensive income
(loss) (2,288)
---------
Comprehensive income (loss) (50,600)
Issuance of Common Stock:
Employee stock purchase plan 203 1 1,296 -- -- 1,297
Exercise of stock options,
including tax benefit 85 -- 703 -- -- 703
--------- --------- --------- --------- --------- ---------
Balance at October 31, 1998 43,777 $ 44 $ 134,702 $ 27,264 $ (2,662) $ 159,348
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
---------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (48,312) $ 15,860
Adjustments:
Depreciation and amortization 16,595 11,177
Noncash restructuring and unusual charges 39,053 --
Deferred income taxes 1,500 8,920
Provision for doubtful accounts 2,745 53
Noncash financing expense 123 --
Changes in operating assets and liabilities:
Receivables 58,118 (81,298)
Inventories 231,338 (59,463)
Prepaid expenses and other assets (4,708) (18,856)
Accounts payable (124,535) 47,596
Accrued and other liabilities (11,190) (5,309)
--------- ---------
Total adjustments 209,039 (97,180)
--------- ---------
Net cash provided by (used in) operating activities 160,727 (81,320)
Cash Flows from Investing Activities:
Capital expenditures (12,575) (13,967)
Purchase of business, net of cash acquired -- (32,486)
--------- ---------
Net cash used in investing activities (12,575) (46,453)
Cash Flows from Financing Activities:
Payments on long-term debt (4,576) (7,367)
Borrowings (repayments) under line of credit, net (143,707) 136,220
Issuance of common stock 1,767 3,177
--------- ---------
Net cash (used in) provided by financing activities (146,516) 132,030
--------- ---------
Net increase in cash 1,636 4,257
Cash at beginning of the period 9,476 5,686
--------- ---------
Cash at end of the period $ 11,112 $ 9,943
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 12,520 $ 7,078
Discounts and net expenses on receivables securitization 5,719 5,860
Distributions on preferred securities of Trust 6,792 6,792
Income taxes (refunds), net (510) 4,942
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
VANSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
(Continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OCTOBER 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental disclosure of noncash investing and financing
activities:
Equipment acquired under capital leases $ 1,127 $ 122
Sysorex purchase:
Fair value of assets acquired $ 85,448
Cash paid, net of cash received (32,486)
--------
Liabilities assumed $ 52,962
========
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Reporting
The financial statements for Vanstar Corporation ("Vanstar" or the
"Company") for the three and six months ended October 31, 1998 and October 31,
1997 are unaudited and have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and Securities and
Exchange Commission regulations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of management, the financial statements
reflect all adjustments (of a normal and recurring nature) which are necessary
for a fair presentation of the financial position, results of operations,
stockholders' equity and cash flows for the interim periods. The results of
operations for the three and six months ended October 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal year.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended April 30, 1998. Certain prior period amounts have
been reclassified to conform to the current presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Financial
Accounting Standards Board ("FASB") Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, which is applicable for
fiscal years beginning after December 15, 1997. This statement establishes
standards for reporting information about operating segments in annual and
interim financial statements, although this statement is not required to be
applied to interim financial statements in the initial year of its application.
Therefore, these disclosures will be included for the first time in the
Company's annual financial statements for the year ending April 30, 1999. The
statement defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The statement requires that segment profit or loss,
certain specific revenue and expense items and segment assets be reported, as
well as reconciled to the financial statements.
2. PROPOSED MERGER WITH INACOM
On October 8, 1998, Vanstar Corporation and InaCom Corp., a Delaware
corporation ("InaCom"), entered into an Agreement and Plan of Merger (the
"Merger Agreement"), providing for InaCom to acquire the Company through the
merger of a wholly-owned subsidiary of InaCom with and into the Company. Under
the terms of the Merger Agreement, holders of the Company's common stock, par
value $.001 per share (the "Common Stock"), generally will receive 0.64 shares
of InaCom common stock, par value $.10 per share ("InaCom Common Stock"), in
exchange for each share of the Common Stock held by such person at the time of
consummation of the merger. The transaction, which is subject to regulatory and
stockholder approval, and certain other customary closing conditions, is
expected to close in January of 1999. The merger is intended to qualify as a
pooling of interests for accounting and financial reporting purposes and
generally to be tax-free to the stockholders of both companies for Federal
income tax purposes.
As inducements to enter into the Merger Agreement, (1) InaCom granted
the Company an option to purchase up to 3,336,689 shares of InaCom Common Stock
at an exercise price of $17.375 per share and (2) Vanstar granted
8
<PAGE> 9
InaCom an option to purchase up to 8,709,623 shares of Common Stock at an
exercise price of $9.125 per share. Each option is exercisable following an
acquisition proposal for the issuing company and the occurrence of certain
further triggering events, none of which has occurred as of the date hereof.
3. EARNINGS PER SHARE
Basic earnings per share are computed using the weighted average number
of shares of Common Stock during the period, and diluted earnings per share are
computed using the weighted average number of shares of Common Stock and
dilutive Common Stock equivalents outstanding during the period. Common Stock
equivalents are computed for the Company's outstanding options using the
treasury stock method.
4. COMPANY-OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY CONVERTIBLE SUBORDINATED DEBT
SECURITIES OF THE COMPANY
During October 1996, Vanstar Financing Trust, a Delaware statutory
business trust of which the Company owns all of the common trust securities (the
"Trust"), sold 4,025,000 Trust Convertible Preferred Securities ("Preferred
Securities"). The Preferred Securities have a liquidation value of $50 per
security and are convertible at any time at the option of the holder into shares
of Common Stock at a conversion rate of 1.739 shares for each Preferred
Security, subject to adjustment in certain circumstances. Distributions on
Preferred Securities accrue at an annual rate of 6 3/4% of the liquidation value
of $50 per Preferred Security and are included in "Distributions on convertible
preferred securities of Trust, net of income taxes" in the Consolidated
Statements of Income. The proceeds of the private placement, which totaled
approximately $194.4 million (net of initial purchasers' discounts and offering
expenses totaling $6.9 million) are included in "Company-obligated mandatorily
redeemable convertible preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company" on the Consolidated
Balance Sheets. The Company has entered into several contractual arrangements
(the "Back-up Undertakings") for the purpose of fully and unconditionally
supporting the Trust's payment of distributions, redemption payments and
liquidation payments with respect to the Preferred Securities. Considered
together, the Back-up Undertakings constitute a full and unconditional guarantee
by the Company of the Trust's obligations on the Preferred Securities.
The Trust invested the proceeds of the offering in 6 3/4% Convertible
Subordinated Debentures due 2016 (the "Debentures") issued by the Company. The
Debentures bear interest at 6 3/4% per annum generally payable quarterly on
January 1, April 1, July 1 and October 1. The Debentures are redeemable by the
Company, in whole or in part, on or after October 5, 1999 at designated
redemption prices. If the Company redeems the Debentures, the Trust must redeem
on a pro rata basis Preferred Securities having an aggregate liquidation value
equal to the aggregate principal amount of the Debentures redeemed. The sole
asset of the Trust is $207.5 million aggregate principal amount of the
Debentures. The Debentures and related income statement effects are eliminated
in the Company's consolidated financial statements.
5. SALE OF ACCOUNTS RECEIVABLE
Effective December 20, 1996, the Company, through a non-consolidated
wholly-owned special purpose corporation, established a revolving funding trade
receivables securitization facility (the "Securitization Facility"), which
currently provides the Company with up to $175 million in available credit. In
connection with the Securitization Facility, the Company sells, on a revolving
basis, certain of its trade receivables ("Pooled Receivables") to the special
purpose corporation, which in turn sells a percentage ownership interest in the
Pooled Receivables to a commercial paper conduit sponsored by a financial
institution. These transactions have been recorded as a sale in accordance with
FASB Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. The amount of the Pooled Receivables,
which totaled $321.5 million at October 31, 1998, is reflected as a reduction to
receivables. The Company retains an interest in certain amounts of the assets
sold. At October 31, 1998, the amount of that retained interest totaled $161.2
million and is included in receivables. The Company is retained as servicer of
the Pooled Receivables. Although management believes that the servicing revenues
earned will be adequate compensation for performing the services, estimating the
fair value of the servicing asset was not considered practicable. Consequently,
a servicing asset has not been
9
<PAGE> 10
recognized in the Consolidated Balance Sheets. The gross proceeds resulting from
the sale of the percentage ownership interests in the Pooled Receivables totaled
$170 million as of October 31, 1998. Such proceeds are included in cash flows
from operating activities in the Consolidated Statements of Cash Flows.
Discounts and net expenses associated with the sales of the receivables totaling
$2.7 million, $5.8 million, $3.1 million and $5.9 million are included in
Financing expenses, net on the Consolidated Statements of Income for the three
and six months ended October 31, 1998 and 1997, respectively.
6. FINANCING EXPENSES, NET
Financing expenses, net includes interest incurred on borrowings under
the Company's financing agreement with IBM Credit Corporation ("IBMCC") and
discounts and net expenses associated with the Securitization Facility.
7. ACQUISITIONS
On July 7, 1997, the Company acquired certain assets and assumed
certain liabilities of Sysorex Information Systems, Inc. ("Sysorex"), a
government technology provider. The purchase price was approximately $54.5
million, and a contingent payment of 500,000 shares of the Company's common
stock based on the financial performance of the acquired business for the period
from July 8, 1997 through April 30, 1999. Based on the financial performance of
the acquired business through October 31, 1998, it is unlikely that the Company
will make the payment of contingent shares. The Sysorex acquisition was
accounted for as a purchase and the excess of the cost over the fair value of
net assets acquired is being amortized on a straight line basis over 20 years.
8. COMMITMENTS AND CONTINGENCIES
On July 3, 1997, a trust claiming to have purchased shares of the
Common Stock filed suit in Superior Court of the State of California. The suit
is entitled David T. O'Neal Trust, Dated 4/1/77, v. Vanstar Corporation, et al.,
Consolidated Case No. CV767266. On January 21, 1998, the same plaintiff, along
with another plaintiff claiming to have purchased shares of Common Stock, filed
suit in the United States District Court for the Northern District of
California, making allegations virtually identical to those in the earlier suit.
The recent suit is captioned David T. O'Neal Trust, Dated 4/1/77, et al. v.
Vanstar Corporation, et al., Case No. C-98-0216 MJJ. Both suits named as
defendants the Company, certain directors and officers of the Company, and the
Company's principal stockholder, Warburg Pincus Capital Co., L.P., and certain
of its affiliates. The complaints in both suits generally allege, among other
things, that the defendants made false or misleading statements or concealed
information regarding the Company and that the plaintiffs, as holders of the
Common Stock, suffered damage as a result.
The plaintiffs in both suits seek class action status, purporting to
represent a class of purchasers of Common Stock between March 11, 1996 and March
14, 1997, and seek damages in an unspecified amount, together with other relief.
The complaint in the first suit purports to state a cause of action under
California law; the complaint in the recent suit purports to state two causes of
action under the Securities Exchange Act of 1934. On July 23, 1998, the
California Superior Court dismissed the state court complaint as to certain
individual defendants. The plaintiffs subsequently have agreed to dismiss the
state court complaint as to all remaining defendants other than the Company and
Richard Bard, a director of the Company. The Company believes that the
plaintiffs' allegations in both suits are without merit and intends to defend
the suits vigorously.
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.
10
<PAGE> 11
9. RESTRUCTURING AND UNUSUAL CHARGES
In August 1998, Vanstar announced a program to reduce expenses in line
with expected revenue and industry dynamics. The program included both items
that qualify as restructuring costs as defined by Emerging Issues Task Force
94-3 and other unusual charges. This program to reduce expenses included a
reduction in workforce and elimination of some of its facilities through
consolidation during the second quarter in accordance with approved management
plans. The Company also wrote-off equipment and systems associated with the
support of certain finance functions that were affected by the realignment of
the business into two operating units and the reduction of workforce. In
addition, the Company wrote-off redundant equipment and systems associated with
the centralized service dispatch and scheduling functions. The Company also
liquidated excess spare parts due to the centralization of its spare parts
management and the outsourcing of a substantial portion of its spare parts
procurement and repair to a single vendor.
Restructuring Charges
Restructuring charges include the cost of facility closures and
consolidations, involuntary employee separation benefits and related costs
associated with business realignment and restructuring actions in accordance
with approved management plans. Facility closure costs of $6.0 million include
future lease payments, costs to abandon or dispose of property and equipment and
capitalized software, net of estimates of sublease revenues and disposal values.
Employee separation benefits of $3.0 million include severance, medical and
other benefits for approximately 250 permanent full-time employees. Reductions
occurred in virtually all areas of the Company. Business realignment costs
relate to the decision to exit the discrete training business as the Company
focuses on its core competencies as part of the realignment of the Company into
two distinct operating units, contract termination costs and other related costs
and are $3.0 million. In connection with the restructuring, the Company recorded
restructuring reserves of approximately $7.4 million, of which $4.1 has been
paid through October 31, 1998. The remaining liability of $3.3 million primarily
relates to the future lease obligations, net of estimates of sublease income.
Unusual Charges
Unusual charges not qualifying as restructuring are reflected in
selling, general and administrative expenses and cost of revenue and consist
primarily of the write-off of certain equipment and capitalized software, costs
to liquidate excess spare parts and inventory adjustments. Capitalized software
and lease costs of $9.0 million include the write-off of systems associated with
the centralized dispatch and scheduling functions and obsolete hardware and
software due to the upgrade of call technology implemented by the Company. The
Company also liquidated excess spare parts due to the centralization of its
spare parts management and the outsourcing of a substantial portion of its spare
parts procurement and repair to a single vendor, resulting in a net charge of
$16.5 million. Inventory adjustments of $5.4 million include costs associated
with the early return of certain inventory items to a major vendor in an effort
to reduce interest expense and additional inventory reserves to record inventory
at lower of cost or market due to the reduced price protection available from
major vendors as part of the supply chain reengineering. Other items of $2.4
million consist primarily of the incentive pay to retain certain employees
during the restructuring activities and costs associated with the termination of
certain marketing commitments.
As the Company implements its strategic plan to respond to current
industry dynamics, there can be no assurance that additional restructuring
actions will not be required. In addition, there can be no assurance that the
estimated costs of the restructuring program will not change.
11
<PAGE> 12
10. COMPREHENSIVE INCOME
Effective for the quarter ended July 31, 1998, the Company adopted FASB
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes standards for the reporting and display of comprehensive income
in a full set of general purpose financial statements, however, the adoption of
this statement has no impact on the Company's net income or stockholders'
equity. Comprehensive income includes net income plus items that, under
generally accepted accounting principles, are excluded from net income and are
reflected as a component of equity, such as currency translation adjustments and
unrealized gains and losses on available-for-sale securities. Statement 130 also
requires the accumulated balance of other comprehensive income to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. Prior period financial
statements have been reclassified to conform to the requirements of Statement
130.
The components of comprehensive income, net of related tax, for the
three and six months periods ended October 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $(37,873) $ 9,300 $(48,312) $ 15,860
Unrealized (losses) on securities (1,997) (2,027) (2,311) (2,864)
Foreign currency translation adjustment -- -- 23 --
-------- -------- -------- --------
Comprehensive income (loss) $(39,870) $ 7,273 $(50,600) $ 12,996
======== ======== ======== ========
</TABLE>
The components of accumulated other comprehensive income, net of
related tax, at October 31, 1998 and April 30, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
----------- -----------
<S> <C> <C>
Unrealized (losses) on securities $ (2,518) $ (207)
Foreign currency translation adjustments (144) (167)
---------- ----------
Accumulated comprehensive (loss) $ (2,662) $ (374)
========== ==========
</TABLE>
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
unaudited consolidated financial statements and related notes of the Company
included elsewhere in this report. This Management's Discussion and Analysis of
Financial Condition and Results of Operations and other parts of this Quarterly
Report on Form 10-Q contain forward-looking statements that involve risks and
uncertainties. Among the risks and uncertainties to which the Company is subject
are the risks inherent in the Company's substantial indebtedness, the fact that
the Company has experienced significant fluctuations in revenues and operating
results, product supply shortages, the risks associated with managing the
Company's inventory and service offerings in light of product life cycles and
technological change, risks associated with the changes described under "Recent
Developments" below, the risks associated with implementing management responses
to changing technology and market conditions, the Company's relationship with
its significant customers, intense price competition in the Company's markets
and the Company's dependence upon its key vendors. As a result, the actual
results realized by the Company could differ materially from the results
discussed in the forward-looking statements made herein. Words or phrases such
as "will," "hope," "anticipate," "expect," "intend," "estimate," "project,"
"plan" or similar expressions are intended to identify forward-looking
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements made in this Quarterly Report on Form 10-Q.
On December 3, 1998, the Company issued a news release announcing its
results for its second fiscal quarter. That release included, among other
information, Comparative Financial Data for certain periods ending on October
31, 1998 and 1997. The amounts shown in this filing for certain item pertaining
to the 1998 periods differ from the amounts shown in the news release due to the
reclassification of certain expenses from SG&A to cost of revenue. The affected
items are Acquisition Services Gross Margin and Gross Margin Percentage, Total
Gross Margin and Gross Margin Percentage, and SG&A.
RECENT DEVELOPMENTS
On October 8, 1998, Vanstar and InaCom entered into the Merger
Agreement providing for InaCom to acquire the Company through the merger of a
wholly-owned subsidiary of InaCom with and into the Company. Under the terms of
the Merger Agreement, holders of the Company's common stock, par value $.001 per
share (the "Common Stock"), generally will receive 0.64 shares of InaCom Common
Stock in exchange for each share of Common Stock held by such person at the time
of consummation of the merger. The transaction, which is subject to regulatory
and stockholder approval, and certain other customary closing conditions, is
expected to close in January of 1999. The merger is intended to qualify as a
pooling of interests for accounting and financial reporting purposes and
generally to be tax-free to the stockholders of both Companies for Federal
income tax purposes.
As inducements to enter into the Merger Agreement, (1) InaCom granted
the Company an option to purchase up to 3,336,689 shares of InaCom Common Stock
at an exercise price of $17.375 per share and (2) Vanstar granted InaCom an
option to purchase up to 8,709,623 shares of the Company's Common Stock at an
exercise price of $9.125 per share. Each option is exercisable following an
acquisition proposal for the issuing company and the occurrence of certain
further triggering events, none of which has occurred as of the date hereof.
In connection with the proposed merger, the Company will incur
significant merger-related costs to integrate and transition its personnel and
systems into InaCom. These merger costs are expensed as incurred. No material
merger costs have been incurred as of October 31, 1998. In addition, as of
October 31, 1998 the amounts of these costs cannot be reasonably estimated.
The Company's primary vendors provide various incentives for promoting
and marketing their products. In addition, the Company is participating in
"Build-to-Order" and "Final Assembly" programs with Compaq, IBM and
Hewlett-Packard, which have reduced the Company's inventory requirements. More
detailed information regarding these matters is described in the "Certain
Business Factors" section of Vanstar's Annual Report on Form 10-K for the year
ended April 30, 1998 under the headings "Dependence on Key Vendors, Vendor
Incentives and Product Supply," "Inventory Management" and "Build-to-Order
Delivery Model and Final Assembly." The Company's primary vendors have announced
or instituted changes in their sales incentive and inventory management
programs. Specifically, the major manufacturers have announced that they will
(1) limit price protection to 3 or 4 weeks rather than the unlimited
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<PAGE> 14
protection previously available, (2) allow product returns on an average of 2%
to 3% of product sales per quarter, rather than the 5% of sales per quarter
previously available, and (3) provide incentives based solely on sales of the
manufacturers' products, rather than on purchases of the products from the
manufacturers, as well. These and further changes in these programs have had and
could continue to have a material adverse effect on the Company's operating
results.
Vanstar is currently a party to a contract with one of its major
vendors that contemplates that the Company will acquire for resale or license
approximately $55 million of software products over a five-year period. At
September 29, 1998 Vanstar had purchased approximately $12 million of such
products. On that date Vanstar notified its vendor that the Company would not
make the scheduled product purchase of $9 million on September 30, 1998 and that
it intended to enter into negotiations with such vendor to alter the terms and
condition of their arrangement to more appropriately reflect market conditions.
Negotiations with respect to such changes have been commenced by the parties and
Vanstar believes, although no assurance to such effect can be given, that such
negotiations will be concluded in the near future without any resulting material
adverse effect on the Company's operating results.
RESULTS OF OPERATIONS
When compared to the results for the three and six months ended October
31, 1997, the Company's results of operations for the three and six months ended
October 31, 1998 were impacted by the following transactions. On July 7, 1997,
the Company acquired certain assets and assumed certain liabilities of Sysorex,
a government technology provider, for a purchase price of approximately $54.4
million, and a contingent payment of 500,000 shares of Common Stock based on the
future financial performance of the acquired business. Based on the financial
performance of the acquired business through October 31, 1998, it is unlikely
that the Company will make the payment of contingent shares. The Sysorex
acquisition was accounted for as a purchase and the excess of the cost over the
fair value of net assets acquired is being amortized on a straight line basis
over 20 years.
In August 1998, Vanstar announced a program to reduce expenses in line
with expected revenue and industry dynamics. The program included both items
that qualify as restructuring costs as defined by Emerging Issues Task Force
94-3 and other unusual charges. This program to reduce expenses included a
reduction in workforce and elimination of some of its facilities through
consolidation, during the second quarter in accordance with approved management
plans. The Company also wrote-off equipment and systems associated with the
support of certain finance functions that were affected by the realignment of
the business into two operating units and the reduction of workforce. In
addition, the Company wrote-off redundant equipment and systems associated with
the centralized service dispatch and scheduling functions. The Company also
liquidated excess spare parts due to the centralization of its spare parts
management and the outsourcing of a substantial portion of its spare parts
procurement and repair to a single vendor.
The Company incurred restructuring charges of $12.0 million during the
three months ended October 31, 1998 which includes the cost of involuntary
employee separation benefits, facility closures and consolidations, and related
costs associated with business realignment and restructuring actions. Unusual
charges of $33.3 million not qualifying as restructuring are reflected in
selling, general and administrative expenses and cost of revenue and consist
primarily of the write-off certain equipment and capitalized software, costs to
liquidate excess spare parts and certain inventory adjustments.
Vanstar's three primary sources of revenue are: Acquisition Services
(formerly referred to as "Product"), Life Cycle Services and Professional
Services. The Company refers to the integration of the offerings of design and
consulting, acquisition and deployment, operation and support, and enhancement
and migration as "Life Cycle Management." For larger clients, Vanstar can manage
every phase of the life cycle of its customers' PC networks. Acquisition
Services revenue is primarily derived from the sale of computer hardware,
software, peripherals and communications devices manufactured by third parties
and sold by the Company, principally to implement integration projects. Life
Cycle Services revenue is primarily derived from services performed for the
desktop and focused on the client or user of the PC network. These support
services include desktop installation, repair and maintenance, moves, adds and
changes, extended warranty, asset management and help desk. Professional
Services revenue is primarily derived from high value-added services, including
services focused on the server and communication segments of the PC network
infrastructure. Professional Services revenue includes network installation,
design and consulting, and enhancement and migration, as well as server
deployment and support and training and education services. In prior
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<PAGE> 15
periods, Other revenue was derived primarily from fees earned on the
distribution services agreement with ComputerLand Corporation (formerly with
Merisel FAB). Pursuant to the distribution services agreement, the Company
provided product distribution to franchises and affiliates of ComputerLand
Corporation ("Computerland"), a subsidiary of Synnex Technologies, Inc.
("Synnex"), through January 1998. Prior to the quarter ended July 31, 1998 the
Company had reported training and education services revenue with Other revenue.
The Company has reclassified all prior periods to conform with the current
period presentation.
The following table sets forth for the unaudited periods indicated, the
Company's (1) revenue, gross margin and gross margin percentage by revenue
source, (2) selling, general and administrative expenses in total and as a
percentage of total revenue and (3) operating income in total and as a
percentage of total revenue.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
October 31, October 31,
------------------------------ ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
REVENUE:
Acquisition services $ 481,500 $ 624,899 $ 1,019,307 $ 1,206,148
Life cycle services 80,247 65,711 158,691 121,905
Professional services 41,648 47,161 80,559 86,305
Other -- 3,978 -- 8,025
----------- ----------- ----------- -----------
Total revenue $ 603,395 $ 741,749 $ 1,258,557 $ 1,422,383
=========== =========== =========== ===========
GROSS MARGIN:
Acquisition services $ 37,461 $ 58,831 $ 85,846 $ 115,435
Life cycle services 33,934 20,023 62,509 35,890
Professional services 17,589 22,854 32,394 38,986
Other -- 3,946 -- 7,921
----------- ----------- ----------- -----------
Total gross margin $ 88,984 $ 105,654 $ 180,749 $ 198,232
=========== =========== =========== ===========
GROSS MARGIN PERCENTAGE:
Acquisition services 7.8% 9.4% 8.4% 9.6%
Life cycle services 42.3% 30.5% 39.4% 29.4%
Professional services 42.2% 48.5% 40.2% 45.2%
Other -- 99.2% -- 98.7%
----------- ----------- ----------- -----------
Total gross margin percentage 14.7% 14.2% 14.4% 13.9%
=========== =========== =========== ===========
Selling, general and
administrative expenses $ 110,185 $ 79,701 $ 205,086 $ 153,159
% of total revenue 18.3% 10.7% 16.3% 10.8%
Restructuring charges $ 12,009 $ -- $ 12,009 $ --
Operating income (loss) $ (33,210) $ 25,953 $ (36,346) $ 45,073
% of total revenue -5.5% 3.5% -2.9% 3.2%
</TABLE>
Three Months Ended October 31, 1998 as Compared to the Three Months Ended
October 31, 1997
Acquisition services. Revenue decreased 22.9% to $481.5 million for the
three months ended October 31, 1998 from $624.9 million for the three months
ended October 31, 1997. Gross margin decreased 36.3% to $37.5 million for the
three months ended October 31, 1998 from $58.8 million for the three months
ended October 31, 1997. The decrease in both revenue and gross margin is
primarily a result of a significant decline in Average Sales Prices ("ASPs") for
computers and an unusual inventory reserve charge of $3.0 million to record
inventory to lower of cost or market due to the reduced price protection
available from major vendors as part of the supply chain reengineering. In
addition, manufacturer product shortages significantly curtailed customer orders
and shipments partially due to the extended order-cycle time during the three
months ended October 31, 1998 as part of the industry-wide supply chain
re-engineering. Gross margin percentage decreased to 7.8% for the three months
ended October 31, 1998 from 9.4% for the three months ended October 31, 1997.
The decrease in gross margin percentage is primarily due to the revenue
shortfall, which resulted in a decrease in vendor incentive funds from
15
<PAGE> 16
computer manufacturers, the inventory reserve charge discussed above and an
increase in freight costs. In addition, Vanstar operates in a very aggressive
price environment that will continue to put pressure on ASPs and gross margin.
Any further decrease in ASPs, or vendor incentive funds or additional product
shortages could have a material adverse effect on Acquisition services revenue
and gross margin.
Life Cycle services. Revenue increased 22.1% to $80.2 million for the
three months ended October 31, 1998 from $65.7 million for the three months
ended October 31, 1997. This increase was the result of increased demand for the
Company's overall Life Cycle service offerings as an increased number of
enterprises outsource a significant portion of network operations and support
services to a single IT provider. Gross margin increased 69.5% to $33.9 million
for the three months ended October 31, 1998 from $20.0 million for the three
months ended October 31, 1997. Gross margin percentage increased to 42.3% for
the three months ended October 31, 1998 compared with 30.5% for the three months
ended October 31, 1997. The Company realized productivity benefits from its
enhanced service delivery model and has been able to reduce direct labor costs
as a percentage of revenue.
Professional services. Revenue decreased 11.7% to $41.6 million for the
three months ended October 31, 1998 from $47.2 million for the three months
ended October 31, 1997. The decrease was a result of a high number of large
project completions in the fourth quarter of the Company's last fiscal year and
slower than expected sales and start-ups of new projects during the three months
ended October 31, 1998. In addition, education services revenue decreased
approximately $2.7 million for the three months ended October 31, 1998 compared
to the three months ended October 31, 1997 primarily due to the sale of the
classroom instruction portion of the education services business in January 1998
and the Company's August 1998 decision to exit the discrete training business.
Excluding the impact of education services, revenue decreased $3.0 million or
7%. Gross margin decreased 23.0% to $17.6 million for the three months ended
October 31, 1998 from $22.9 million for the three months ended October 31, 1997,
primarily due to a decrease in revenue and in utilization rates. Gross margin
percentage decreased to 42.2% for the three months ended October 31, 1998 from
48.5% for the three months ended October 31, 1997. The decrease in gross margin
percentage was the result of higher direct labor costs as a percentage of
revenue due to lower utilization rates during the period.
Other. Revenue is zero for the three months ended October 31, 1998
compared to $3.9 million for the three months ended October 31, 1997 due to the
elimination of the fees earned on the distribution agreement with ComputerLand,
a subsidiary of Synnex. Pursuant to the distribution services agreement, the
Company provided product distribution to franchises and affiliates of
ComputerLand. That agreement terminated in January 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 38.2% to $110.2 million for the three
months ended October 31, 1998 from $79.1 million for the three months ended
October 31, 1997. The increase in selling, general and administrative expenses
was primarily due to the unusual charges, not qualifying as restructuring
charges, of $30.3 million recorded during the quarter, which consist primarily
of the write-off of certain equipment and capitalized software, costs to
liquidate excess spare parts and certain inventory adjustments. Capitalized
software and lease costs of $9 million include the write-off of systems
associated with the centralized dispatch and scheduling functions and obsolete
hardware and software due to the upgrade of call technology implemented by the
Company. The Company also liquidated excess spare parts due to the
centralization of its spare parts management and the outsourcing of a
substantial portion of its spare parts procurement and repair to a single vendor
resulting in a net charge of $16.5 million. Inventory adjustments of $2.4
million include costs associated with the early return of certain inventory
items to a major vendor in an effort to reduce interest expense. Other items of
$2.4 million consist primarily of the incentive pay to retain certain employees
during the restructuring activities and costs associated with the termination of
certain marketing commitments. Excluding the impact of the unusual items,
selling, general and administrative expenses increased 1% to $79.9 million for
the three months ended October 31, 1998 from $79.1 million for the three months
ended October 31, 1997. Selling, general and administrative expenses as a
percentage of revenue increased to 18.3% for the three months ended October 31,
1998 from 10.7% for the three months ended October 31, 1997 due to a combination
of the unusual charges incurred during the quarter and the decline in total
revenue because expense levels are based, in part, on future anticipated revenue
levels.
Restructuring charges. The Company incurred restructuring charges of
$12.0 million during the three months ended October 31, 1998 which includes the
cost of involuntary employee separation benefits, facility closures and
consolidations, and related costs associated with business realignment and
restructuring actions. Facility closure costs are approximately $6.0 million and
include future lease payments, costs to abandon or dispose of property and
16
<PAGE> 17
equipment and capitalized software net of estimates of sublease revenues and
disposal values. Employee separation benefits are approximately $3.0 million and
include severance, medical and other benefits for approximately 250 permanent
full-time employees. Business realignment costs relate to the decision to exit
the discrete training business as the Company focuses on its core competencies
as part of the realignment of the Company into two distinct operating units
contract termination costs and other related costs and are approximately $3.0
million.
Operating income (loss). The Company incurred an operating loss of
($33.2) million for the three months ended October 31, 1998 compared to
operating income of $26.0 million for the three months ended October 31, 1997 as
a result of the factors discussed above. Operating income (loss) as a percentage
of total revenue decreased to (5.5%) for the three months ended October 31, 1998
from 3.5% for the three months ended October 31, 1997.
Financing expenses, net. Financing expenses, net for the three months
ended October 31, 1998 and 1997 represents primarily interest incurred on
borrowings under the Company's financing agreement with IBMCC and net expenses
associated with the Company's Securitization Facility. Financing expenses
decreased 13.6% to $6.9 million for the three months ended October 31, 1998 from
$7.9 million for the three months ended October 31, 1997 due to lower average
borrowings and lower interest rates. The decrease in borrowings was primarily
due to reduced inventory levels that are financed primarily under the IBMCC
agreement.
Taxes. The effective tax rate for the three months ended October 31,
1998 was 11% compared to 36% for the three months ended October 31, 1997. The
decrease in the effective tax rate is due to an adjustment to the income
liability account and an increase in valuation reserves on deferred income
taxes. At October 31, 1998 and April 30, 1998, the Company has recorded net
deferred tax assets of $20.4 million and $20.6 million, respectively. The net
deferred tax asset at October 31, 1998 is net of a $5.0 million valuation
allowance due to the uncertainty of the realization of the deferred tax assets.
The full realization of the net deferred tax assets carried at October 31, 1998
is dependent upon the Company's achieving sufficient future pretax earnings.
Although realization is not assured, management believes that sufficient taxable
income will be generated from operations to realize the net deferred tax assets.
Distributions on convertible preferred securities of trust, net of tax.
In October 1996, the Trust issued 4,025,000 Preferred Securities as part of a
refinancing plan directed at reducing the Company's overall interest costs.
Distributions on Preferred Securities accrue at an annual rate of 6 3/4% of the
liquidation value of $50 per security and are included in "Distributions on
convertible preferred securities of Trust, net of income taxes" in the
Consolidated Statements of Income (see note 4 of Notes to Consolidated Financial
Statements).
Six Months Ended October 31, 1998 as Compared to the Six Months Ended October
31, 1997
Acquisition services. Revenue decreased 15.5% to $1,019.3 million for
the six months ended October 31, 1998 from $1,206.1 million for the six months
ended October 31, 1997. Gross margin decreased 25.6% to $85.8 million for the
six months ended October 31, 1998 from $115.4 million for the six months ended
October 31, 1997. The decrease in both revenue and gross margin is primarily a
result of a significant decline in ASPs for computers and the inventory reserve
charge of $3.0 million previously discussed. In addition, manufacturer product
shortages during the six months ended October 31, 1998 significantly curtailed
customer orders and shipments during the period. Gross margin percentage
decreased to 8.4% for the six months ended October 31, 1998 from 9.6% for the
six months ended October 31, 1997. The decrease in gross margin percentage is
primarily due to the revenue shortfall, which resulted in a decrease in vendor
incentive funds from computer manufacturers, additional inventory reserve
charge, and an increase in freight costs. In addition, Vanstar operates in a
very aggressive price environment that will continue to put pressure on ASPs and
gross margin. Any further decreases in ASPs, decrease in vendor incentive funds
or additional product shortages could have a material adverse effect on
Acquisition services revenue and gross margin.
Life Cycle services. Revenue increased 30.2% to $158.7 million for the
six months ended October 31, 1998 from $121.9 million for the six months ended
October 31, 1997. This increase was the result of increased demand for the
Company's overall Life Cycle service offerings as an increased number of
enterprises outsource a significant portion of network operations and support
services to a single IT provider. Gross margin increased 74.2% to $62.5 million
for the six months ended October 31, 1998 from $35.9 million for the six months
ended October 31, 1997. Gross margin percentage increased to 39.4% for the six
months ended October 31, 1998 compared with 29.4% for
17
<PAGE> 18
the six months ended October 31, 1997. The Company realized productivity
benefits from its enhanced service delivery model and has been able to reduce
direct labor costs as a percentage of revenue.
Professional services. Revenue decreased 6.7% to $80.6 million for the
six months ended October 31, 1998 from $86.3 million for the six months ended
October 31, 1997. The decrease was a result of a high number of large project
completions in the fourth quarter of the Company's last fiscal year and slower
than expected sales and start-ups of new projects during the six months ended
October 31, 1998. In addition, education services revenue decreased
approximately $4.7 million for the six months ended October 31, 1998 compared to
the six months ended October 31, 1997, primarily due to the sale of the
classroom instruction portion of the education services business in January 1998
and the Company's August 1998 decision to exit the discrete training business.
Excluding the impact of education services, revenue decreased $1.1 million or
1.4%. Gross margin decreased 16.9% to $32.4 million for the six months ended
October 31, 1998 from $39.0 million for the six months ended October 31, 1997
primarily due to a decrease in revenue and utilization rates. Gross margin
percentage decreased to 40.2% for the six months ended October 31, 1998 from
45.2% for the six months ended October 31, 1997. The decrease in gross margin
percentage was the result of higher direct labor costs as a percentage of
revenue due to lower utilization rates during the period.
Other. Revenue is zero for the six months ended October 31, 1998
compared to $8.0 million for the six months ended October 31, 1997 due to the
elimination of the fees earned on the distribution agreement with ComputerLand,
a subsidiary of Synnex. Pursuant to the distribution services agreement, the
Company provided product distribution to franchises and affiliates of
ComputerLand. That agreement terminated in January 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 33.8% to $205.1 million for the six months
ended October 31, 1998 from $153.2 million for the six months ended October 31,
1997. The increase in selling, general and administrative expenses was primarily
due to the unusual charges not qualifying as restructuring charges of $30.3
million recorded during the most recent quarter, as discussed above. Excluding
the impact of the unusual items, selling, general and administrative expenses
increased 14.0% to $174.8 million for the six months ended October 31, 1998 from
$153.2 million for the six months ended October 31, 1997. The increase is
primarily due to an increase in indirect labor to support the increase in
service revenue as a percent of total revenue. Selling, general and
administrative expenses as a percentage of revenue increased to 16.3% for the
six months ended October 31, 1998 from 10.8% for the six months ended October
31, 1997 due to a combination of the unusual charges incurred during the quarter
and the decline in total revenue because expense levels are based, in part, on
future anticipated revenue levels.
Restructuring charges. The Company incurred restructuring charges of
$12.0 million during the six months ended October 31, 1998 as discussed above.
Operating income (loss). The Company incurred an operating loss of
($36.3) million for the six months ended October 31, 1998 compared to operating
income of $45.1 million for the six months ended October 31, 1997 as a result of
the factors discussed above. Operating income (loss) as a percentage of total
revenue decreased to (2.9%) for the six months ended October 31, 1998 from 3.2%
for the six months ended October 31, 1997.
Financing expenses, net. Financing expenses, net for the six months
ended October 31, 1998 and 1997 represents primarily interest incurred on
borrowings under the Company's financing agreement with IBMCC and net expenses
associated with the Company's Securitization Facility. Financing expenses
increased 24.2% to $16.6 million for the six months ended October 31, 1998 from
$13.3 million for the six months ended October 31, 1997 due to higher average
borrowings partially offset by lower interest rates. The increase in borrowings,
which resulted in higher financing expenses, was due to the Company's purchasing
significant quantities of inventory from manufacturers to take advantage of
volume discounts. These inventory purchases were financed primarily under the
IBMCC agreement. During the sixth months ended October 31, 1998, the Company has
reduced borrowings under the agreements discussed above by approximately $174
million.
Taxes. The effective tax rate for the six months ended October 31, 1998
was 17% compared to 36% for the six months ended October 31, 1997. The decrease
in the effective tax rate is due to an adjustment to the income tax liability
account and an increase in valuation reserves on deferred taxes. At October 31,
1998 and April 30, 1998, the Company has recorded net deferred tax assets of
$20.4 million and $20.6 million, respectively. The net deferred tax asset at
October 31, 1998 is net of a $5.0 million valuation allowance due to the
uncertainty of the realization of
18
<PAGE> 19
the deferred tax assets. The full realization of the net deferred tax assets
carried at October 31, 1998 is dependent upon the Company's achieving sufficient
future pretax earnings. Although realization is not assured, management believes
that sufficient taxable income will be generated from operations to realize the
net deferred tax assets.
Distributions on convertible preferred securities of trust, net of tax.
In October 1996, the Trust issued 4,025,000 Preferred Securities as part of a
refinancing plan directed at reducing the Company's overall interest costs.
Distributions on Preferred Securities accrue at an annual rate of 6 3/4% of the
liquidation value of $50 per security and are included in "Distributions on
convertible preferred securities of Trust, net of income taxes" in the
Consolidated Statements of Income (see note 4 of Notes to Consolidated Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
The pending InaCom merger will result in the acceleration of all
amounts outstanding under the Company's financing agreement with IBMCC and the
Securitization Facility, which will then be immediately due, unless the Company
obtains waivers or consents from, or makes other arrangements with, IBMCC and
certain parties associated with the Securitization Faciltiy. In addition, due to
certain cross-default provisions, the Company's $207.5 million aggregate
principal amount of Debentures due 2016 issued to the Trust in connection with
the Trust's sale of the Preferred Securities could become due and payable if the
Company defaults on one or more of the obligations noted above. No effect of a
change in control is reflected in the accompanying unaudited consolidated
financial statements.
During the six months ended October 31, 1998, the Company used cash
generated from operations, including sales of certain of its trade receivables,
to fund its operations, working capital requirements, payments on its long-term
debt and purchases of capital equipment.
Effective December 20, 1996, the Company established the Securitization
Facility, which currently provides the Company with up to $175 million in
available credit. Pursuant to the Securitization Facility, the Company, through
a wholly owned subsidiary, sells an undivided percentage ownership interest in
the Pooled Receivables. As of October 31, 1998, the proceeds of the sales
totaled $170 million.
The Company's operating activities provided cash of $160.7 million for
the six months ended October 31, 1998 as a result of decreases in both accounts
receivable and inventories, partially offset by a decrease in accounts payable.
The decrease in accounts receivable was primarily a result of decreased sales
during the quarter ended October 31, 1998. The decrease in inventory was a
result of the Company's transitioning to a "Build-to-Order" delivery model as
part of the supply chain reengineering by the manufacturers. The decrease in
accounts payable was primarily funded through the short-term line of credit.
During the six months ended October 31, 1998, the Company used cash of
$12.6 million for capital expenditures. The Company plans to make additional
investments in its automated systems and its capital equipment throughout the
remainder of fiscal year 1999.
The Company currently has a $350 million line of credit under its
financing agreement with IBMCC. At October 31, 1998 the Company had $241.5
million outstanding under that facility, of which $76.9 million is included in
accounts payable and $164.6 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. As of October 31, 1998 amounts borrowed
under the line of credit bear interest at a rate generally equal to the London
Interbank Offered Rate plus 1.6% (representing a rate of 7.3% at October 31,
1998). The line of credit is currently scheduled to expire March 31, 1999.
The Company believes that future cash generated from operations,
together with cash available through its financing agreement with IBMCC and from
the Securitization Facility, will be sufficient to meet its cash requirements
through at least fiscal year 1999.
19
<PAGE> 20
YEAR 2000
Many existing computer systems, including certain of the Company's
internal systems, use only the last two digits to identify years in the date
field. As a result, those systems may not accurately distinguish years in the
21st century from years in the 20th century, or may not function properly when
faced with years later than 1999. This problem is generally referred to as the
"Year 2000 Issue." Computer systems that are able to deal correctly with dates
after 1999 are referred to as "Year-2000-Compliant."
With respect to its internal systems and operations, the Company is
addressing the Year 2000 Issue through a five-phase project plan. The five
phases of the plan are:
(1) Inventory and Assessment, which included compiling an inventory of
hardware and software, then assessing the effects of 21st-century dates on
each system and, in the case of systems that are not yet
Year-2000-Compliant, the risk to the Company's business if that system
were not operating.
(2) Solution Planning, which generally involved organizing and planning the
task of ensuring that the Company's computer systems are
Year-2000-Compliant. This process included classifying the systems into
units ("Production Groupings") and scheduling the Production Groupings for
conversion, generally with the goal of treating the most important and
vulnerable systems first. This phase also included contacting all vendors
for the status of their software and plans for compliance.
(3) Conversion, which involves making necessary changes to render each
Production Grouping Year-2000-Compliant.
(4) Testing each Production Grouping.
(5) Implementing each Production Grouping.
The Company has completed the first two phases of the plan and has
completed a significant portion of phases three through five. In addition, most
of the Company's systems are already Year-2000-Compliant. The Company hopes to
complete all five phases of the plan by mid-1999.
The Company expects to implement successfully the systems and
programming changes necessary to address the Year-2000 Issue and does not expect
the total costs associated with that implementation to be material to the
Company's financial position or results of operations over the term of the
project. Vanstar's management believes that the most reasonably likely worst
case scenario is that a small number of vendors will be unable to supply
component parts for a short time after January 1, 2000, resulting in a
disruption of product shipments and related services to Vanstar's customers.
Vanstar believes that those problems could be addressed without any material
adverse impact on its operations and intends to develop, modify and implement
appropriate contingency plans as it becomes aware of any such vendors and the
nature and magnitude of their respective Year 2000 Issues. To the extent than
any Year 2000 Issues beyond Vanstar's perceived worst case scenario described
above materialize and Vanstar is unable to timely develop an appropriate
contingency plan, those problems could have a material impact on Vanstar's
operations.
The statements above describing the Company's plans and objectives for
handling the Year 2000 Issue and the expected impact of the Year 2000 Issue on
the Company are forward-looking statements. Those statements involve risks and
uncertainties that could cause actual results to differ materially from the
results discussed above. Factors that might cause such a difference include, but
are not limited to, delays in executing the plan outlined above and increased or
unforeseen costs associated with the implementation of the plan and any
necessary changes to the Company's systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 8, 1998, as a condition and an inducement to the parties'
entering into the Merger Agreement, the Company granted InaCom an option to
purchase up to 8,709,623 shares (subject to certain anti-dilution adjustments)
of Common Stock at an exercise price of $9.125 per share (the "Vanstar
Option"), and InaCom granted the Company an option to purchase up to 3,336,689
shares (subject to certain anti-dilution adjustments) of InaCom Common Stock at
an exercise price of $17.375 per share. The Company issued the Vanstar Option
in reliance on the exemption in Section 4(2) of the Securities Act of 1933, as
amended.
The Vanstar Option is exercisable only upon the occurrence of all of the
following events: (1) the Merger Agreement is terminated and, as a result of
the termination, a fee is payable by the Company to InaCom under the Merger
Agreement; (2) before the termination, a third party makes a proposal for an
acquisition transaction for the Company; and (3) either before or within 12
months following the termination, the Company's stockholders approve that
acquisition transaction. The Vanstar Option remains in effect until the
earliest of the following: (1) the effective time of the merger; (2) the date
on which the Merger Agreement is properly terminated, except when a termination
fee is payable by Vanstar to InaCom pursuant to the Merger Agreement and before
that termination a third party makes an acquisition proposal for the Company;
and (3) 13 months after the Merger Agreement is terminated. The exercise period
may be extended if the Vanstar Option is not exercisable by reason of certain
governmental judgments, decrees, orders, laws or regulations. Notwithstanding
the termination of the Vanstar Option, the Company is entitled to repurchase
the shares of Common Stock with respect to which InaCom exercised the Vanstar
Option prior to the termination.
The Company has the right of first refusal to purchase shares of Common
Stock acquired by InaCom under the Vanstar Option at the price and on the terms
offered by a third party for those shares.
The Company may also repurchase, or InaCom may require the repurchase of,
the Vanstar Option (during the time it is exercisable) or the shares issued
upon the exercise thereof. Subject to certain profit limitations, (1) the
repurchase price of the Vanstar Option will equal the difference between the
exercise price of the Vanstar Option and the market price of the underlying
shares and (2) the repurchase price of the shares acquired upon the exercise of
the Vanstar Option will be based on an average of sale prices on the New York
Stock Exchange or, in the event of an acquisition proposal for the Company, the
highest price to be paid per share in the acquisition proposal.
-21-
<PAGE> 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1998 Annual Meeting of Stockholders was held on September
9, 1998. Three items of business were acted upon at the meeting: (1) the
election of eight directors to serve until the next Annual Meeting of
Stockholders and until their successors are duly elected and qualified; (2)
approval of an amendment to the Company's 1996 Stock Option/Stock Issuance Plan,
as amended (the "1996 Option Plan"), increasing the number of shares subject to
grant under the 1996 Option Plan from 3,300,000 shares to 6,300,000 shares; and
(3) approval of an amendment to the Company's Employee Stock Purchase Plan (the
"ESPP") increasing the number of shares subject to grant under the ESPP from
1,000,000 shares to 2,000,000 shares.
The results of the voting for the election of directors were as
follows:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD ABSTENTIONS BROKER NONVOTES
------- --------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
John W. Amerman 33,858,493 167,690 0 0
Richard H. Bard 33,860,536 165,647 0 0
Stewart K.P. Gross 33,863,733 162,450 0 0
William H. Janeway 33,861,576 164,607 0 0
John R. Oltman 33,862,943 163,240 0 0
William Y. Tauscher 33,840,724 185,459 0 0
John L. Vogelstein 33,634,606 391,577 0 0
Josh S. Weston 33,861,629 164,554 0 0
</TABLE>
Accordingly, each of the eight nominees received a plurality of the
votes cast and was elected.
The results of the voting on the approval of the amendment to increase
the number of shares subject to grant under the 1996 Option Plan from 3,300,000
shares to 6,300,000 shares were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NONVOTES
--------- ------------- ----------- ---------------
<S> <C> <C> <C>
24,098,989 3,737,227 61,748 0
</TABLE>
Accordingly, the number of shares voted for the proposal constituted a
majority of the shares entitled to vote thereon, and the amendment to the 1996
Option Plan was approved.
The results of the voting on the approval of the amendment to increase
the number of shares subject to grant under the ESPP from 1,000,000 shares to
2,000,000 shares were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NONVOTES
--------- ------------- ----------- ---------------
<S> <C> <C> <C>
27,269,952 514,470 56,642 0
</TABLE>
Accordingly, the number of shares voted for the proposal constituted a
majority of the shares entitled to vote thereon, and the amendment to the ESPP
was approved.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of October 8,
1998, among InaCom Corp. ("InaCom"), InaCom
Acquisition, Inc. and the Registrant (incorporated
herein by reference from Exhibit 99.1 to the Current
Report on Form 8-K, dated October 9, 1998, filed by
InaCom (Commission File Number 0-16114) (the "InaCom
8-K")). Certain schedules and exhibits to the
Agreement and Plan of Merger have been omitted. The
Registrant will furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon
request.
10.1* Separation and Consulting Agreement between Jay Amato
and the Registrant.
10.2* Amendment No. 10 to the Second Amended and Restated
Financing Program Agreement, dated October 30, 1998,
between the Registrant and IBM Credit Corporation.
27* Financial Data Schedule
99.1 Stock Option Agreement, dated as of October 8, 1998,
between the Registrant, as grantor, and InaCom, as
grantee (incorporated by reference from Exhibit 99.4
to the InaCom 8-K).
99.2 Stock Option Agreement dated as of October 8, 1998,
between InaCom, as grantor, and the Registrant, as
grantee (incorporated by reference from Exhibit 99.3
to the InaCom 8-K).
99.3 Stock Voting Agreement, dated as of October 8, 1998,
among Warburg, Pincus Capital Company, L.P., InaCom
and the Registrant (incorporated by reference from
Exhibit 99.2 to the InaCom 8-K).
99.4 Form of Stock Voting Agreements entered into by the
directors of InaCom, InaCom and the Registrant
(incorporated by reference from Exhibit 99.6 to the
Schedule 13D, dated October 19, 1998, filed by the
Registrant).
99.5 Form of Stock Voting Agreements entered into by the
directors of the Registrant, InaCom and the
Registrant (incorporated by reference from Exhibit 6
to the Schedule 13D, dated October 18, 1998, filed by
InaCom).
</TABLE>
* Filed herewith
B. REPORTS ON FORM 8-K
During the quarter ended October 31, 1998, the Company filed a Current
Report on Form 8-K, dated October 8, 1998, reporting the execution of
the Merger Agreement with InaCom under "Item 5. Other Events."
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VANSTAR CORPORATION
Dated: December 15, 1998 By: /s/ Kauko Aronaho
-------------------------------------
Name: Kauko Aronaho
Title: Senior Vice President and Chief
Financial Officer
24
<PAGE> 25
VANSTAR CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of October 8, 1998, among
InaCom Corp. ("InaCom"), InaCom Acquisition, Inc. and the Registrant
(incorporated herein by reference from Exhibit 99.1 to the Current
Report on Form 8-K, dated October 9, 1998, filed by InaCom
(Commission File Number 0-16114) (the "InaCom 8-K")). Certain
schedules and exhibits to the Agreement and Plan of Merger have been
omitted. The Registrant will furnish supplementally a copy of any
omitted schedule or exhibit to the Commission upon request.
10.1* Separation and Consulting Agreement between Jay Amato and the
Registrant.
10.2* Amendment No. 10 to the Second Amended and Restated Financing
Program Agreement, dated October 30, 1998, between the Registrant
and IBM Credit Corporation.
27* Financial Data Schedule
99.1 Stock Option Agreement, dated as of October 8, 1998, between the
Registrant, as grantor, and InaCom, as grantee (incorporated by
reference from Exhibit 99.4 to the InaCom 8-K).
99.2 Stock Option Agreement dated as of October 8, 1998, between
InaCom, as grantor, and the Registrant, as grantee (incorporated by
reference from Exhibit 99.3 to the InaCom 8-K).
99.3 Stock Voting Agreement, dated as of October 8, 1998, among Warburg,
Pincus Capital Company, L.P., InaCom and the Registrant
(incorporated by reference from Exhibit 99.2 to the InaCom 8-K).
99.4 Form of Stock Voting Agreements entered into by the directors of
InaCom, InaCom and the Registrant (incorporated by reference from
Exhibit 99.6 to the Schedule 13D, dated October 19, 1998, filed by
the Registrant).
99.5 Form of Stock Voting Agreements entered into by the directors of
the Registrant, InaCom and the Registrant (incorporated by reference
from Exhibit 6 to the Schedule 13D, dated October 18, 1998, filed by
InaCom).
</TABLE>
* Filed herewith
25
<PAGE> 1
EXHIBIT 10.1
SEPARATION AND CONSULTING AGREEMENT
This Separation and Consulting Agreement (the "Agreement") is entered into
between JAY S. AMATO ("Amato") and VANSTAR CORPORATION, a Delaware corporation
("Vanstar"), to set forth the terms of Amato's separation from employment with
Vanstar, together with certain other matters relating thereto.
In consideration of the mutual promises, covenants and agreements set forth
below, the adequacy and sufficiency of which are hereby acknowledged, Amato and
Vanstar agree as follows:
1. TERMINATION OF EMPLOYMENT. Amato will cease his current employment
with Vanstar for all purposes effective on the Employment Change Date (as
hereafter defined) and shall commence, at such time, the performance of the
consulting services contemplated in Paragraph 2 below. On or before the
Employment Change Date, Amato will submit to Vanstar the attached Exhibit A
letter of resignation evidencing Amato's resignation as President of Vanstar and
as an officer and/or director of all subsidiaries and affiliates of Vanstar.
Amato will continue as a member of the Board of Directors of Vanstar for the
remainder of his current term. The Employment Change Date shall mean August 31,
1998.
2. OBLIGATION OF THE PARTIES. In connection with Amato's resignation as
an employee of Vanstar, Vanstar and Amato have agreed as follows:
(a) On the Employment Change Date, Vanstar shall pay to Amato
$737,498. Vanstar shall pay Amato an additional $737,498 in four equal
installments of $184,374.50 on each of November 1, 1998, February 1, 1999,
May 1, 1999 and August 1, 1999; provided, upon the occurrence of a Change
of Control of Vanstar, any unpaid portion of such amount shall be
immediately paid to Amato.
(b) Amato shall be retained as a consultant by Vanstar for a period
beginning on the Employment Change Date and terminating on the earlier to
occur of (x) a Change of Control of Vanstar (as hereafter defined) and (y)
the first anniversary of the Employment Change Date, as such term may be
extended by the mutual written agreement of Amato and Vanstar (the
"Consulting Period"). During the Consulting Period, Amato will provide such
consulting, advisory and related services (the "Consulting Services") as
may be reasonably requested by the Chief Executive Officer of Vanstar. The
actual hours and days to be expended by Amato in the performance of the
Consulting Services shall be mutually agreed to by the parties. In
rendering the Consulting Services, Amato shall be an independent contractor
and not an employee of the Company or any subsidiary or affiliate of the
Company and, as such, Amato shall not be nor hold himself out as an
officer, partner, employee, or agent of the Company or any of its
subsidiaries or affiliates.
<PAGE> 2
(c) During the Consulting Period, Amato shall be furnished with an
office at Vanstar's New York, New York location (including use of Vanstar's
customary administrative support associated therewith, such as facsimile
machines, voice mail and e-mail usage), together with such reasonable
secretarial support as may be appropriate to permit Amato to perform the
Consulting Services. Vanstar shall also pay all reasonable costs of
relocation of Amato to the greater New York area consistent with Vanstar's
current Relocation Policy, including Vanstar HR Policy 415 which provides
reimbursement on an after tax basis for all such costs of relocation.
(d) All of Amato's outstanding options to purchase shares of the
common stock (the "Options") of Vanstar shall vest in accordance with and
shall otherwise continue to be subject to the terms and conditions
contained in the applicable stock option agreements (including, without
limitation, a requirement that such options be exercised on or before the
90th day following the expiration of the Consulting Period); provided, in
the event Amato complies with the terms of this Agreement during the
Consulting Period, Vanstar hereby covenants and agrees to cause any Options
which remain unvested in accordance with their terms as of the last day of
the Consulting Period to become fully vested as of the last day of the
Consulting Period.
(e) Reference is hereby made to that certain Executive Involuntary
Severance Agreement dated May 26, 1998 between Vanstar and Amato (the
"Prior Severance Agreement"). In the event of the occurrence of a Change of
Control of Vanstar (as such term is defined in the Prior Severance
Agreement), or in the event that a transaction is deemed to be a "Change of
Control" under the terms of Executive Involuntary Severance Agreements for
other officers of Vanstar, on or prior to the last day of the Consulting
Period, Vanstar shall pay to Amato, in addition to payment specified in
Section 2(a) and (b) above, the sum of $737,438, within two (2) business
days of the Change of Control (the "Change of Control Payment").
3. TAXES. Except as hereafter provided, Amato agrees that if any taxing
authority determines taxes, penalties or interest to be due or owing with
respect to any monies, compensation or benefits payable to or received by Amato
hereunder, Amato shall be solely responsible for and shall timely remit the
payment of all such taxes, penalties and interest or shall reimburse Vanstar
promptly upon demand, for any such taxes, penalties or interest for which it may
become liable. Notwithstanding the foregoing, in the event that Vanstar makes a
Change of Control Payment to Amato, then the provisions of Section 6 of the
Prior Severance Agreement (Obligation to Reimburse for Taxes) shall apply to all
payments made to Amato pursuant to the terms of this Agreement.
4. CONFIDENTIAL TERMS. Amato acknowledges that in the course of his
employment with Vanstar he has acquired, and that during the Consulting Period
Amato may acquire, trade secrets and other confidential and proprietary
information of Vanstar, its subsidiaries or affiliates.
<PAGE> 3
Amato further agrees that the terms of this Agreement shall be treated as
confidential. Amato covenants and agrees that he will retain all such trade
secrets, confidential and proprietary information concerning the foregoing in
trust for the sole benefit of Vanstar and that he will not disclose,
disseminate, publicize, or cause or permit to be disclosed, disseminated, or
publicized, any of such trade secrets, confidential and proprietary information
to any person, corporation, association, governmental agency, or any other
entity, other than his professional outplacement counselor, legal counsel and
tax advisor under circumstances where such persons have a need to know, except:
(a) to the extent necessary to report income to appropriate tax
authorities;
(b) in response to an order or subpoena of a court of competent
jurisdiction; or
(c) to the extent any such information shall become publicly
available or known otherwise than as a result of any breach of this
Agreement;
(d) in response to any subpoena issued by a state or federal
governmental agency;
provided, however, that notice of receipt of any such order or subpoena shall be
immediately communicated to Vanstar so that Vanstar may have an opportunity to
intervene and assert its rights with respect to nondisclosure prior to Amato's
response to such order or subpoena. Vanstar may make disclosure of this
Agreement as required by law, including, without limitation, disclosure required
by applicable securities laws.
5. COVENANT NOT TO COMPETE; NONSOLICITATION COVENANT.
(a) Amato agrees that for a period of one (1) year from the date
hereof, he will not, without the prior written consent of Vanstar, which
consent may be withheld in Vanstar's sole discretion, engage, whether for
compensation or not, as an individual proprietor, owner, partner,
stockholder, officer, director, employee, investor, sales representative or
in any other capacity whatsoever in any activity or endeavor that competes
in the United States of America directly or indirectly with the business of
Vanstar or its subsidiaries or affiliates.
(b) Amato further agrees that until the earlier to occur of (x) the
second anniversary of the Employment Change Date and (y) the first
anniversary following any Change of Control of Vanstar, Amato will not,
directly or indirectly (x) solicit, take away, hire, employ or endeavor to
employ any person who is an employee of Vanstar or any of its subsidiaries
or affiliates, and shall further refrain from providing, directly or
indirectly, assistance to any third party who seeks to solicit, take away,
hire, employ or endeavor to employ any such person and (y) solicit or
conduct business with any person or entity that is a Material Client of
Vanstar. The term Material Client of Vanstar means any person or entity to
whom Vanstar or any of its subsidiaries or affiliates made sales of any
products or services in excess of $1,000,000 during the one (1) year period
preceding the Employment Change Date.
<PAGE> 4
(c) Amato's covenants contained in this Section 5 will be construed
as independent of any other provision in this Agreement; and the existence
of any claim or cause of action by Amato against Vanstar will not
constitute a defense to the enforcement by Vanstar of said covenants. Amato
understands that the covenants contained in this Section are essential
elements of the transaction contemplated by this Agreement and, but for
Amato's agreement to this Section, Vanstar would not have agreed to provide
Amato payments described herein. Amato has been advised to consult with
counsel in order to be informed in all respects concerning the
reasonableness and propriety of this Section and its provisions wit
specific regard to the nature of the business conducted by Vanstar. Amato
further agrees and acknowledges that this Section (i) is reasonable as to
length of time, scope and geographic area for purposes of protecting the
commercial advantages enjoyed by Vanstar, (ii) will not interfere with
Amato's ability to pursue a proper livelihood, (iii) does not impose a
greater restraint than is necessary to protect the goodwill or business
interests of Vanstar and (iv) is reasonable in relation to the
consideration derived by Amato under this Agreement. Amato further agrees
that notwithstanding any other alleged breach of any provision in this
Agreement, the provisions of this Section will be valid and binding upon
Amato. Vanstar and Amato also agree that any applicable court shall have
jurisdiction to modify any provision of this covenant not to compete in
accordance with the court's ruling as to reasonableness or scope of
application and that this Section shall remain enforceable as modified or
amended in the jurisdiction where this Section is so modified or amended.
(d) Amato hereby acknowledges his duty, both by contract and common
law, not to interfere with contractual relationships and not to use
proprietary and confidential information concerning customers or clients of
Vanstar for the advantage of any person or entity other than Vanstar.
(e) Vanstar may assign Amato's covenants contained in this Section 5
to any person or entity acquiring a material portion of the business and
assets of Vanstar. Within thirty (30) days of any such assignment, Vanstar
shall notify Amato of such assignment, together with the name and address
of the assignee.
6. CONTINUATION OF BENEFITS. Vanstar shall maintain in full force and
effect, for the continued benefit of Amato and Amato's dependents, for two (2)
years after the Employment Change Date, insured and self-insured employee
welfare benefit plans in which Amato was entitled to participate immediately
prior to the Employment Change Date, provided that Amato's continued
participation (or that of Amato's dependents) is possible under the general
terms and provisions of such plan (and any applicable funding mechanism) and
that Amato continues to pay an amount equal to Amato's regular contribution (as
if Amato remained an employee of Vanstar) under such plan for such
participation. In the event that Amato's participation in any such plans is
barred, Vanstar, at its sole expense, shall arrange to have issued for the
benefit of Amato and Amato's dependents, individual policies of insurance
providing benefits substantially similar on an after-tax basis to those that
Amato otherwise would have been entitled to receive under such plans pursuant to
this Section 6 and Amato shall pay to Vanstar the amount or amounts that would
have been required as a contribution from Amato, or, if such insurance is not
<PAGE> 5
available at a reasonable cost to Amato, Vanstar shall otherwise provide
substantially equivalent benefits to Amato (on an after-tax basis).
7. TERMINATION OF PRIOR SEVERANCE AGREEMENT. Except for the incorporation
by reference of the definition of Change of Control and the terms of the section
entitled Obligation to Reimburse for Taxes set forth in the Prior Separation
Agreement as specified in Section 2(e) and Section 3 above, the Prior Separation
Agreement is hereby terminated and of no further force or effect, without any
obligation of Vanstar to pay Amato any sums due and owing thereunder; it being
specifically acknowledged and agreed by Amato that the terms of this Agreement
supersede all payment obligations due and owing to Amato by Vanstar under the
terms of the Prior Severance Agreement.
8. RETURN OF INFORMATION/PROPERTY. Except for the laptop computer used by
Amato in performing his employment duties prior to the Employment Change Date
(which, exclusive of any confidential and proprietary information of Vanstar
included therein, shall be considered the property of Amato), Amato agrees that
he will return to Vanstar, not later than 30 days from date of his execution of
this Agreement, all copies of all documents, computer discs, tapes or other
tangible media of any sort which he has in his possession or under his custody
or control, whether developed by him or others, that are the property of Vanstar
or that contain the confidential or proprietary information of Vanstar or that
relate in any manner to his duties at Vanstar or his positions with Vanstar
other than media containing information otherwise available to the public, that
relate to Amato's contractual rights arising from his employment or that Amato
must retain in order to provide the Consulting Services. Any media retained by
Amato as being necessary to the performance of the Consulting Services together
with all copies thereof and any excerpts therefrom or analyses thereof, in
whatever media maintained, shall be returned to the Company within thirty (30)
days following the termination of the Consulting Period.
9. COMMUNICATIONS. Amato agrees not to disparage, or make any disparaging
remark or send any disparaging communications concerning Vanstar, or any of its
affiliates, or with respect to any existing or future products, the business,
the financial condition or the prospects of Vanstar or any of its affiliates, or
with respect to any officer, director or employee of Vanstar or any of its
affiliates unless Amato is required to make such disclosure pursuant to
applicable law. Vanstar agrees not to disparage, or make any disparaging remark
or send any disparaging communications concerning Amato or Amato's services on
behalf of Vanstar or Amato's termination of employment with Vanstar unless
Vanstar is required to make such disclosure pursuant to applicable law. Amato
and Vanstar shall consult with each other in good faith before issuing any press
release or otherwise making any public statement with respect to this Agreement,
and neither party shall issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or by
obligations pursuant to any listing agreement with any national securities
exchange or by the National Association of Securities Dealers, Inc.
10. RELEASE OF VANSTAR. In consideration of the promises and actions of
Vanstar in this Agreement, Amato hereby releases and forever discharges Vanstar
and all subsidiaries,
<PAGE> 6
predecessors, related and affiliated entities and all directors, officers,
employees, representatives and agents thereof (in all capacities, including
individually) from any and all claims, demands, actions or causes of action that
he may have had or now has whether known or unknown, contingent, or otherwise,
whether at law or in equity, including, without limitation, any and all claims
relating to his employment with and separation from Vanstar (except the benefits
to be provided under the terms of this Agreement); any claim of discrimination
based upon his race, color, creed, sex, age, national origin, disability or
handicap, if any; any claim that Vanstar has violated any federal, state or
local statute, regulation or ordinance with respect to his employment or the
separation thereof, including, without limitation, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Americans with Disability Act,
and the Texas Commission on Human Rights Act; any claim that Vanstar has
wrongfully terminated his employment or breached any oral, written or implied
employment contract; any claim that Vanstar has violated Amato's rights if any,
under the United States or any state constitution or the public policies of any
state; and any claim of injury or tortious conduct by Vanstar including, without
limitation, negligent or fraudulent misrepresentation, negligent or intentional
infliction of emotional distress, invasion of privacy, libel, slander or
defamation. Notwithstanding the foregoing, Amato does not release and discharge
Vanstar from any obligations of Vanstar to indemnify Amato as an officer and/or
director of Vanstar and its subsidiaries or affiliates for all periods of time
in which Amato serves or has served in such capacities pursuant to the terms of
Vanstar's certificate of incorporation, by-laws and any other written
contractual agreements between Vanstar and Amato providing such indemnification
(collectively, the "Indemnification Provisions"). Vanstar specifically
acknowledges and agrees that the Indemnification Provisions shall remain in full
force and effect following the Employment Change Date pursuant to their
applicable terms.
11. RELEASE OF AMATO. Vanstar hereby releases Amato from any and all
claims or causes of action it has against Amato for his actions or failure to
act while employed in his capacity as an employee or officer of Vanstar.
12. COVENANT NOT TO SUE. By signing this Agreement and accepting the
benefits hereunder, Amato acknowledges that as part of this Agreement he is
agreeing that he will not pursue any individual claim against Vanstar, its
affiliate corporations and subsidiaries, or any of their respective officers,
directors, shareholders, employees or agents, in any federal, state or municipal
court or before any federal, state or municipal agency, including, for example,
the Equal Employment Opportunity Commission or the Department of Labor.
13. COOPERATION. Amato agrees to cooperate fully with Vanstar as
reasonably directed by Vanstar by responding to questions, attending meetings,
depositions, administrative proceedings and court hearings, executing documents,
and cooperating with Vanstar and its accountants and legal counsel with respect
to business issues and/or claims and litigation of which he has personal or
corporate knowledge. Amato further agrees to maintain in strict confidence any
information with respect to which he has knowledge regarding current and/or
future claims, administrative proceedings and litigation. Amato agrees to
communicate with any party(ies), their legal counsel or other person, firm or
entity adverse to Vanstar in any such claims, administrative proceedings or
litigation solely through Vanstar designated legal counsel. Amato shall be
entitled to reimbursement for reasonable out-of-pocket expenses for travel,
meals
<PAGE> 7
and lodging in connection with any cooperation services provided at the
Company's request pursuant to this Paragraph..
14. ENFORCEMENT OF COVENANTS. The parties agree that violation of any
obligation imposed by this Agreement shall cause irreparable damage, and, if so,
that the injured party shall be entitled to obtain an injunction or decree of
specific performance from any court of competent jurisdiction restraining the
other from such violation, and directing performance according to the terms of
this Agreement. Such remedies shall be cumulative and non-exclusive of any other
remedies either party may have, including, but not limited to, the recovery of
actual damages. The parties further agree that the injured party will be
entitled to indemnification in full for all costs and expenses, including
reasonable attorneys' fees, which may be incurred by any such party as a result
of the breach of any term, condition, or covenant of this Agreement by the
other.
15. COMPLETE AGREEMENT; AMENDMENT. Amato further acknowledges and agrees
that no other promise or agreement of any kind has been made to him by Vanstar
to cause him to sign this Agreement and that the only consideration for Amato's
signing this Agreement is set forth completely and expressly in this document.
No modification or amendment to any of the terms, conditions or provisions
hereof may be enforced unless evidenced by a subsequent written agreement
executed by each of the parties hereto or their duly authorized representatives.
16. KNOWING AND VOLUNTARY. Amato acknowledges that he has carefully read
this Agreement, understands its meaning and intent, has had the opportunity to
discuss this Agreement with legal counsel and other advisors in its entirety to
the extent necessary to evaluate the benefits and the terms of this Agreement
and that he has signed this Agreement freely and voluntarily and without undue
influence.
17. ENFORCEABILITY. If any term or clause of this Agreement, not being the
essence of this Agreement, shall be held to be invalid, illegal or
unenforceable, such provision or clause shall not affect the validity, legality
or enforceability of the reminder of this Agreement, it being understood and
agreed that (a) such invalid, illegal or unenforceable provision shall be deemed
to be modified to the extent necessary to render it valid, legal and enforceable
without altering the intent thereof or (b) if such modification is not possible,
this Agreement shall be construed as if such invalid, illegal or unenforceable
provision had never been contained herein.
18. COUNTERPARTS; FACSIMILE COPIES. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument. The parties hereby
agree that a facsimile copy of this Agreement will be deemed an original for all
purposes, and each hereby waives the necessity of providing the original copy of
this Agreement to bind the other.
19. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and may be enforced by the parties to this Agreement their respective heirs,
executors, administrators, legatees, successors and assigns.
20. WAIVER. The waiver by any party hereto of a breach of any provision of
this Agreement shall not operate or be construed as a waiver of any subsequent
breach by any party, nor
<PAGE> 8
shall any waiver operate or be construed as a rescission of this Agreement. No
breach of this Agreement shall permit the non-breaching party to repudiate this
Agreement or refuse or fail to perform any obligation required hereunder.
21. NOTICES. All notices to the parties hereunder shall be addressed to
the address printed on the signature page of this Agreement, unless one party
has otherwise notified the other of a change in address, in which event notice
shall be given to such party at the changed address. Any notice given under this
Agreement shall be written and shall be deemed to have been sufficiently given
or made if (a) delivered personally (b) sent by reputable next-day or overnight
mail or delivery, proof of delivery requested, or (c) sent by facsimile (receipt
confirmed) to the facsimile number set forth on the signature page hereto.
22. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia, notwithstanding any conflict
of laws rules to the contrary.
23. HEADINGS. Headings contained in this Agreement are for reference
purposes only and shall not effect in any way the meaning or interpretation of
this Agreement.
[Signature page follows]
<PAGE> 9
August 31, 1998
JAY S. AMATO /s/ Jay Amato
Address:
-----------------------------------
-----------------------------------
Facsimile Number:
------------------
VANSTAR CORPORATION
August 31, 1998 By: /s/ William Y. Tauscher
--------------------------------
William Y. Tauscher, Chairman
Address:
1100 Abernathy Road
Building 500, Ste. 1200
Atlanta, Georgia 30328
Attn: General Counsel
Facsimile Number: 770/522-4587
<PAGE> 1
EXHIBIT 10.2
AMENDMENT #10 TO VANSTAR CORPORATION
SECOND AMENDED AND RESTATED FINANCING PROGRAM AGREEMENT
This Amendment to Vanstar Corporation Second Amended and Restated
Financing Program Agreement (this "Amendment") is made as of October 30, 1998
by and among Vanstar Corporation, a Delaware Corporation ("Vanstar") Vanstar
Government Systems, Inc. ("VGS"), a Delaware corporation and IBM Credit
Corporation, a Delaware corporation ("IBM Credit").
RECITALS:
A. Vanstar, VGS (individually a "Borrower" and jointly the "Borrowers")
and IBM Credit have entered into that certain Vanstar Corporation Second
Amended and Restated Financing Agreement dated as of April 30, 1995 (as
amended by Amendment #1 dated as of September 15, 1995, Amendment #2
dated as of October 26, 1995, Amendment #3 dated as of November 10, 1995,
Acknowledgment, Waiver and Amendment dated as of April 17, 1996, Amendment #4
dated as of July 24, 1996, Amendment #5 dated as of September 25, 1996,
Amendment #6 dated as of December 20, 1996, Amendment #7 dated as of October
31, 1997, Amendment #8 dated as of December 11, 1997, Acknowledgment, Waiver
and Amendment dated as of March 10, 1998, Amendment #9 dated as of March 16,
1998 and as the same may be further amended, supplemented or otherwise modified
from time to time, the "Agreement").
B. The parties have agreed to modify the Agreement as more specifically
set forth below, upon and subject to the terms and conditions of the Agreement
as set forth herein.
AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Borrowers and IBM Credit hereby agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Agreement.
SECTION 2. Modification of Agreement.
A. The following provisions are incorporated into and supplement the
Agreement as if fully set forth as additional terms therein. In the event of a
conflict between the terms of this Amendment and the terms of the Agreement,
the terms of this Amendment will control in determining the agreement between
IBM Credit and Borrower.
"Temporary Credit Line Extension and Increase. Pursuant to Amendment #9 to
Vanstar Corporation Second Amended and Restated Financing Agreement executed by
and among Vanstar, VGS and IBM Credit on March 16, 1998 and IBM Credit's letter
to Vanstar dated June 24, 1998 and executed by Mr. Kauko Aronaho, Borrowers'
Chief Financial Officer, on July 1, 1998, the Temporary Credit Line is hereby
terminated effective as of November 1, 1998."
B. Section 3(b) of the Agreement is hereby modified by inserting
immediately following the last sentence of the third paragraph, the following
three sentences:
"If the full amount of any amounts owed under this Agreement is not paid
by its due date, including but not limited to any amounts due as a result of
acceleration of the obligations, the unpaid amount will
Page 1 of 3
<PAGE> 2
bear interest from its due date until IBM Credit receives payment thereof, at a
per annum rate equal to (i) for the period from July 1, 1998 through September
30, 1998, Libor plus 2.60% and (ii) from October 1, 1998 and thereafter, Libor
plus 6.50%. The aforesaid interest rate will be applied to the average daily
balance of the outstanding payment(s) due for the delinquent period. Such
finance charges shall be calculated based upon a year of 360 days for the
actual days elapsed."
C. Section 13(a)(x) of the Agreement is hereby amended by deleting
Section 13(a)(x) in its entirety and substituting, in lieu thereof, the
following:
"any "person" (as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) acquires a beneficial interest in 50% or more
of the voting stock of either Borrower without the prior written consent of IBM
Credit."
D. Section 13(b)(i) of the Agreement is hereby amended by inserting
immediately prior to the end of the first sentence thereof, the following:
"provided, further, however, upon the occurrence of an Event of
Default pursuant to Section 13(a)(x) of the Agreement, all Advances, together
with all finance charges thereon shall be due and payable according to their
existing repayment terms or on or prior to thirty days after the date of the
change of control of either Borrower whichever date occurs first"
E. Section 19 of the Agreement is hereby amended by modifying the
definition of "Prime Rate" by deleting the second, third and fourth sentences
of the definition thereof.
F. Section 19 of the Agreement is hereby amended by deleting "October
31, 1998" in the definition of "Revolving Period" in its entirety and
substituting, in lieu thereof, "March 31, 1999".
SECTION 3. Representations and Warranties. Each Borrower makes to IBM
Credit the following representations and warranties all of which are material
and are made to induce IBM Credit to enter into this Amendment.
SECTION 3.1 Accuracy and Completeness of Warranties and Representations.
All representations made by Borrowers in the Agreement were true and accurate
and complete in every respect as of the date made, and, as amended by this
Amendment, all representations made by Borrowers in the Agreement are true,
accurate and complete in every material respect as of the date hereof, and do
not fail to disclose any material fact necessary to make representations not
misleading.
SECTION 3.2 Violation of Other Agreements. The execution and delivery of
this Amendment and the performance and observance of the covenants to be
performed and observed hereunder do no violate or cause either Borrower not to
be in compliance with the terms of any agreement to which such Borrower is a
party.
SECTION 3.3 Litigation. There is no litigation, proceeding, investigation or
labor dispute pending or threatened against either Borrower, which if adversely
determined, would materially adversely affect the ability of Borrowers to
perform their obligations under the Agreement and the other documents,
instruments and agreements executed in connection therewith or pursuant hereto.
SECTION 3.4 Enforceability of Amendment. This Amendment has been duly
authorized, executed and delivered by Borrowers and is enforceable against
Borrowers in accordance with its terms.
Page 2 of 3
<PAGE> 3
SECTION 4. Ratification of Agreement. Except as specifically amended hereby,
all of the provisions of the Agreement shall remain unamended and in full force
and effect. Each Borrower hereby ratifies, confirms and agrees that the
Agreement, as amended hereby, represents a valid and enforceable obligation of
Borrowers, and is not subject to any claims, offsets or defense.
SECTION 5. Governing Law. This Amendment shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 6. Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be an original and all of which shall
constitute one agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed by the
authorized officers of the undersigned as of the day and year first above
written.
Vanstar Corporation Vanstar Government Systems, Inc.
By: /s/ K. Aronaho By: /s/ H.C. Covington
------------------------------------ --------------------------------
Print Name: K. Aronaho Print Name: H.C. Covington
Title: Senior Vice President and C.F.O. Title: Senior Vice President
IBM Credit Corporation
By: /s/ Salvatore Grasso
-----------------------------------
Print Name: Salvatore Grasso
Title: Manager, Credit Operations
Page 3 of 3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SECOND
QUARTER FORM 10-Q OF VANSTAR GROUP, INC. FOR THE FISCAL YEAR ENDED APRIL 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 11,112
<SECURITIES> 0
<RECEIVABLES> 298,274
<ALLOWANCES> 9,100
<INVENTORY> 231,726
<CURRENT-ASSETS> 563,113
<PP&E> 115,646
<DEPRECIATION> 64,074
<TOTAL-ASSETS> 781,682
<CURRENT-LIABILITIES> 425,608
<BONDS> 581
194,915
0
<COMMON> 44
<OTHER-SE> 159,304
<TOTAL-LIABILITY-AND-EQUITY> 781,682
<SALES> 1,019,307
<TOTAL-REVENUES> 1,258,557
<CGS> 933,461
<TOTAL-COSTS> 1,077,808
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,127
<INCOME-PRETAX> (52,896)
<INCOME-TAX> (9,042)
<INCOME-CONTINUING> (43,854)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (48,312)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> (1.11)
</TABLE>
