SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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(Mark One)
( X ) Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly
Period Ended July 1, 1995
OR
( ) Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number: 0-16114
INACOM CORP.
(Exact name of registrant as specified in its charter)
Delaware 47-0681813
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10810 Farnam, Suite 200
Omaha, Nebraska 68154
(Address of principal executive offices)
Telephone number (402) 392-3900
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 twelve months, and (2) has
been subject to such filing requirements for the past ninety days:
Yes (X) No ( )
As of August 1, 1995 there were 9,994,668 common shares of the
registrant outstanding.
InaCom Corp. and Subsidiaries
Condensed and Consolidated Balance Sheets
(Unaudited)
(Amounts in Thousands)
July 1, December 31,
1995 1994
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ASSETS
Current assets:
Cash and cash equivalents $ 17,944 10,514
Accounts receivable, net 101,871 184,973
Inventories 253,097 228,652
Other current assets 6,138 6,097
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Total current assets 379,050 430,236
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Other assets, net 16,775 18,702
Cost in excess of net assets of business
acquired, net of accumulated amortization 25,319 26,081
Property and equipment, net 41,311 44,856
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$ 462,455 519,875
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 233,359 226,121
Short term borrowings
and current portion of long-term debt 35,667 96,710
Other current liabilities 26,678 28,646
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Total current liabilities 295,704 351,477
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Long-term debt 23,667 30,333
Other long-term liabilities 2,475 2,475
Stockholders' equity:
Capital stock:
Class A preferred stock of $1 par value.
Authorized 1,000,000 shares; none issued -- --
Common stock of $.10 par value. Authorized
30,000,000 shares; issued
10,040,000 shares 1,004 1,004
Additional paid-in capital 89,265 89,314
Retained earnings 51,856 47,167
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142,125 137,485
Less:
Cost of common shares in treasury of
108,282 in 1995 and 176,182 in 1994 936 1,533
Unearned restricted stock 580 362
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Total stockholders' equity 140,609 135,590
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$ 462,455 519,875
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InaCom Corp. and Subsidiaries
Condensed and Consolidated Statement of Operations
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
July 1, June 25, July 1, June 25,
1995 1994 1995 1994
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Revenues:
Independent reseller channel
and distribution facilities $ 268,883 213,678 510,247 427,732
Company-owned business centers 235,018 178,995 456,704 350,111
Other 23,008 15,970 43,914 30,094
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526,909 408,643 1,010,865 807,937
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Direct costs:
Independent reseller channel
and distribution facilities 259,984 207,288 493,237 407,918
Company-owned business centers 200,975 156,802 390,196 300,736
Other 17,562 11,775 33,128 21,882
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478,521 375,865 916,561 730,536
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Gross margin 48,388 32,778 94,304 77,401
Selling, general and
administrative expenses 40,361 43,292 79,877 81,012
------ ------ ------ ------
Operating income (loss) 8,027 (10,514) 14,427 (3,611)
Interest expense 3,663 2,872 6,480 5,317
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Earnings (loss) before income tax 4,364 (13,386) 7,947 (8,928)
Income tax expense (benefit) 1,789 (5,488) 3,258 (3,660)
----- ------- ----- -------
Net earnings (loss) $ 2,575 (7,898) 4,689 (5,268)
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Earnings (loss) per share $ .25 (.77) .46 (.51)
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Weighted average shares outstanding 10,300 10,300 10,300 10,300
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InaCom Corp. and Subsidiaries
Condensed and Consolidated Statement of Cash Flows
(Unaudited)
(Amounts in Thousands)
TWENTY-SIX WEEKS ENDED
July 1, June 25,
1995 1994
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Cash flows from operating activities:
Net earnings (loss) $ 4,689 (5,268)
Adjustments to reconcile net earnings (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 9,831 9,455
(Increase) decrease in accounts receivable (16,898) 28,603
Increase in inventories (24,445) (7,708)
Increase in other current assets (41) (4,971)
Increase in accounts payable 7,238 7,321
(Decrease)increase in other current
liabilities (1,968) 9,629
Decrease in long-term liabilities -- (1,102)
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Net cash (used in) provided by
operating activities (21,594) 35,959
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Cash flows from investing activities:
Additions to property and equipment (3,197) (9,672)
Proceeds from notes receivable 568 361
(Increase) decrease in other assets (711) 716
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Net cash used in investing activities (3,340) (8,595)
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Cash flows from financing activities:
(Payments of) proceeds from long-term debt (6,667) 17,000
Proceeds from receivables sold 100,000 --
Payments of short-term borrowings (61,043) (44,990)
Proceeds from exercise of stock options 74 414
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Net cash provided by (used in)
financing activities 32,364 (27,576)
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Net increase (decrease) in cash and cash
equivalents 7,430 (212)
Cash and cash equivalents, beginning of the
period 10,514 9,672
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Cash and cash equivalents, end of the period $ 17,944 9,460
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InaCom Corp. and Subsidiaries
Notes to Condensed and Consolidated Financial Statements
(Unaudited)
1. Condensed and Consolidated Financial Statements
The condensed and consolidated financial statements are unaudited and
reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a
fair presentation of the financial position and operating results for
the interim periods. The condensed and consolidated financial
statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's
Annual Report to Stockholders incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994. The results of operations for the six months ended
July 1, 1995 are not necessarily indicative of the results for the
entire fiscal year ending December 30, 1995.
2. Accounts Receivable
In June 1995, the Company entered into an agreement to sell $100
million of accounts receivable, with limited recourse, to an unrelated
financial institution. New qualifying receivables are sold to the
financial institution as collections reduce previously sold
receivables in order to maintain a balance of $100 million sold
receivables. On July 1, 1995, $21.4 million of additional accounts
receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company
receivables have been substantially less than such additional amount. At
July 1, 1995, the interest rate was 7.92%
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist of computer hardware, software, voice
and data equipment and related materials.
4. Common Stock
Earnings per share of common stock have been computed on the basis of
the weighted average number of shares of common stock outstanding
during each period presented.
5. Supplemental Disclosures of Cash Flow Information
For purposes of the condensed and consolidated statement of cash
flows, the Company considers cash and cash investments with a maturity
of three months or less to be cash equivalents.
Interest and income taxes paid are summarized as follows (dollars in
thousands):
1995 1994
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Interest paid $ 7,203 5,460
Income taxes paid $ 1,526 441
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6. Marketing Development Funds
Primary vendors of the Company provide various incentives, in cash or
credit against obligations, for promoting and marketing their product
offerings. The funds or credits received are based on the purchases
or sales of the vendor's products and are earned through performance
of specific marketing programs or upon completion of objectives
outlined by the vendors. Funds or credits earned are applied to
direct costs or selling, general and administrative expenses depending
on the objectives of the program. Funds or credits from the Company's
primary vendors typically range from 1% to 3% of purchases from these
vendors.
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
Results of Operations
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Revenues for the second quarter and first six months of 1995 increased
$118 million or 28.9% and $203 million or 25.1% over the second
quarter and first six months of 1994, respectively. Revenue growth
resulted primarily from the Company-owned business centers where
revenue increased $56 million (31.3%) and $106.6 million (30.5%) over
the second quarter and first six months of 1994, respectively.
Revenue from the independent reseller channel increased $55.2 million
(25.8%) and $82.5 million (19.3%) over the second quarter and first
six months of 1994, respectively. Revenue from other sources
increased $7 million (44.1%)and $13.8 million (45.9%) over the second
quarter and first six months of 1994, respectively.
Revenues from the Company-owned business centers increased as a result
of broad based revenue growth across all regional locations. Revenues
from the independent reseller channel increased as a result of broad
based growth within the Company's
existing reseller channel, an increase in products shipped directly to
the end-user customer on instruction from the reseller and an increase
in second source revenue. Second source revenue is generated from
sales to independent resellers who are not InaCom resellers by
contract. These revenues are primarily a result of open sourcing
which resulted from certain manufacturers, during 1994, lessening or
eliminating requirements from independent resellers to purchase
product from one source. Revenue from other sources increased as a
result of the growth in voice and data equipment sales as well as
growth in product liquidation sales.
The sales backlog at July 1, 1995 was $37.3 million compared to $87.5
million at the end of the same quarter of the previous year. The
decrease in backlog is the result of better product availability from
the manufacturers. Such backlog orders are not necessarily firm since
large end-user customers may place orders with several computer
resellers and accept products from the first computer reseller to
provide delivery.
Gross margin dollars for the second quarter and first six months of
1995 increased $15.6 million (47.6%) and $16.9 million (21.8%) over
the second quarter and first six months of 1994, respectively. The
gross margin percentage was 9.2% for the second quarter of 1995
compared to 8.0% for the second quarter of 1994, and 9.3% for the
first six months of 1995 versus 9.6% for the comparable period of
1994. The gross margin percentage for the independent reseller
channel was 3.3% in the second quarter of 1995 compared to 3.0% for
the second quarter of 1994, and 3.3% for the first six months of 1995
versus 4.6% for the comparable period of 1994. The gross margin
percentage for the Company-owned business centers was 14.5% in the
second quarter of 1995 compared to 12.4% in the second quarter of
1994, and 14.6% for the first six months of 1995 versus 14.1% for the
comparable period of 1994. The gross margin percentage from other
sources was 23.7% in the second quarter of 1995 compared to 26.3% in
the second quarter of 1994, and 24.6% for the first six months of 1995
versus 27.3% for the comparable period in 1994.
During the second quarter of 1994 the Company reported a loss due in
part to non-recurring charges relating to (i) a Department of Defense
contract, $4.5 million; (ii) settlement of certain warranty claims,
$1.0 million; (iii) a receivable from a supplier that filed
bankruptcy, $1.3 million; and (iv) severance costs for corporate staff
reductions, $320,000. A more detailed description of such charges was
included in the Company's 10-K report for the fiscal year ended
December 31, 1994.
Excluding the impact of the non-recurring charges recognized in the
second quarter of 1994, gross margin dollars for the second quarter
and first six months of 1995 increased $10.5 million (27.8%) and $11.8
million (14.3%) over the second quarter and first six months of 1994,
respectively. The gross margin percentage for the second quarter and
first six months of 1995, exclusive of non-recurring charges
recognized in the second quarter of 1994, decreased 0.1 and 0.9
percentage points over the second quarter and first six months of
1994, respectively. The gross margin percentages for the independent
reseller channel for the second quarter and first six months of 1995,
exclusive of non-recurring charges recognized in the
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
(Continued)
second quarter of 1994, decreased 0.8 and 1.9 percentage points over
the second quarter and first six months of 1994, respectively. The
gross margin percentage for the Company-owned business centers for the
second quarter and first six months of 1995, exclusive of non-
recurring charges recognized in the second quarter of 1994, increased
0.5 percentage points and decreased 0.3 percentage points over the
second quarter and first six months of 1994, respectively.
The decrease in gross margin percentages for the independent reseller
channel resulted from market pricing pressures. These market pricing
pressures are primarily attributable to open sourcing which began in
the second quarter of 1994. The gross margin percentage in the
independent reseller channel was 3.3% in the second quarter of 1995,
3.4% in the first quarter of 1995 and 3.3% in the fourth quarter of
1994.
The increase in gross margin percentages for the Company-owned
business centers in the second quarter of 1995 is a result of a better
mix of sales of higher margin services, technical and consulting,
versus sales of lower margin hardware and software products. The
decrease in gross margin percentage for the first six months of 1995
versus the same period in the prior year is due to a decrease in
hardware and software margins. The decrease in hardware and software
margins is a result of lower margins obtained on selling products in
larger volumes to customers.
The decrease in gross margin percentage from other sources in the
second quarter and first six months of 1995 when compared to the same
periods in 1994 is primarily a result of the increase in lower margin
product liquidation sales in relation to higher margin voice and data
communications equipment, service and rental revenues.
Selling, general and administrative (SG&A) expenses for the second
quarter and first six months of 1995 decreased $2.9 million (6.8%) and
$1.1 million (1.4%)over the second quarter and first six months of
1994, respectively. SG&A as a percent of revenue was 7.6% in the
second quarter of 1995 compared to 10.6% in the second quarter of
1994, and 7.9% for the first six months of 1995 compared to 10.0% for
the comparable period in 1994. Excluding the impact of non-recurring
charges recognized in the second quarter of 1994, SG&A expenses for
the second quarter and first six months of 1995 decreased $0.9 million
(2.2%) and increased $0.9 million (1.1%) over the second quarter and
first six months of 1994, respectively. SG&A as a percent of revenue
decreased 2.4 and 1.9 percentage points over the second quarter and
first six months of 1994 excluding the impact of non-recurring charges
recognized in the second quarter of 1994.
The decrease in spending for the second quarter of 1995 versus the
same period in 1994 resulted primarily from holding expense levels and
an increase in market development funds earned from various vendors
and credited against SG&A. The increase in vendor funds resulted from
higher revenues in the second quarter of 1995 compared to the same
period in 1994. The increase in spending for the first six months of
1995 compared to the same period in 1994 resulted primarily from
spending due to the increased revenues. The decrease in SG&A as a
percent of revenue for the second quarter and first six months of 1995
versus the same periods in 1994 resulted from the increase in market
development funds earned, as mentioned above, as well as the
operational efficiencies achieved through investments in distribution
center automation and information systems.
Interest expense was $3.7 million in the second quarter of 1995
compared to $2.9 million in the second quarter of 1994, and $6.5
million for the six months ended July 1, 1995 compared to $5.3 million
for the comparable period in 1994. Interest expense increased due to
higher average borrowing rates. Average daily borrowings for the
second quarter of 1995 were $24.5 million less than the average
borrowings for the same period in the prior year, and $32.8 million
less for the first six months of 1995 than the average borrowings for
the same period in 1994. The average borrowing rate for the second
quarter of 1995 increased approximately 1.9 percentage points from the
same period in the prior year, and 1.7 percentage points for first six
months of 1995 versus the same period in 1994.
The effective tax (benefit) rate was 41.0% for the second quarter and
first six months of 1995 and 41.0% for the comparable periods in 1994.
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
(Continued)
Net earnings were $2.6 million or $.25 per share for the quarter ended
July 1, 1995 versus a net loss of $7.9 million or $.77 per share for
the corresponding period in 1994. The net earnings were $4.7 million
or $.46 per share for the six months ending July 1, 1995 versus a net
loss of $5.3 million or $.51 per share for the comparable period in
1994. Excluding the non-recurring charges recognized in the second
quarter of 1994, the net loss for the second quarter of 1994 was $3.7
million or $.36 per share, and $1.0 million or $.10 per share for the
first six months of 1994. The changes in net earnings result from the
factors discussed above.
Liquidity and Capital Resources
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The Company's primary sources of liquidity are provided through a
working capital financing agreement for $350.0 million and $30.3
million in private placement loans.
In June 1995 the Company entered into a working capital financing
agreement with IBM Credit Corporation and terminated the previous
revolving credit facilities. The $350.0 million working capital
financing agreement expires June 29, 1998. At
July 1, 1995, $29.0 million was outstanding under the working capital
line and the interest rate was 7.92%.
The two private placement notes are held by unaffiliated insurance
companies. The principal amount of the first note, $13.3 million, is
payable in two annual installments of $6.7 million commencing on May
31, 1996 and bears interest at 10.31% payable quarterly. The
principal amount of the second note, $17 million, is payable in five
annual installments of $3.4 million commencing on February 28, 1997
and bears interest at 6.83% payable quarterly.
The working capital and debt agreements contain certain restrictive
covenants, including the maintenance of minimum levels of working
capital, tangible net worth, fixed charge coverage, limitations on
incurring additional indebtedness and restrictions on the amount of
net loss that the Company can incur. The Company was in compliance
with the covenants contained in the working capital and debt
agreements at July 1, 1995.
Long-term debt was 14.4% of total long-term debt and equity at July 1,
1995 versus 18.7% at June 25, 1994. The decrease is primarily a
result of the reduction in long term debt due to the scheduled payment
of $6.7 million on one of the private placement notes.
In June 1995, the Company entered into an agreement to sell $100
million of accounts receivable, with limited recourse, to an unrelated
financial institution. New qualifying receivables are sold to the
financial institution as collections reduce previously sold
receivables in order to maintain a balance of $100 million sold
receivables. On July 1, 1995, $21.4 million of additional accounts
receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company
receivables have been substantially less than such additional amount. At
July 1, 1995, the interest rate was 7.92%
During the first half of 1995 the Company used $21.6 million of cash
in operations. Inventory increased by $24.4 million during the first
six months with a portion of the increase financed through an increase
in accounts payable of $7.2 million. Inventory increased during the
first half of 1995 as a result of inventory positions taken on new
product lines of several major manufacturers. Accounts payable
increased as a result of the increase in inventory as well as the
Company's continued focus on matching accounts payable and inventory
levels. Accounts receivable levels also increased $16.9 million due
to the increased revenues.
Cash used in investing activities for the first half of 1995 totaled
$3.3 million, of which $3.2 million resulted from additions to
property and equipment.
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
(Continued)
Net cash provided by financing for the first half of 1995 totaled
$32.4 of which $100 million was provided from the sale of accounts
receivable. Proceeds were used to reduce long term and short term
borrowings by $6.7 million and $61.0 million, respectively.
The Company believes the funding expected to be generated from
operations and provided by the credit facilities will be sufficient to
meet working capital and capital investment needs in 1995.
InaCom Corp. and Subsidiaries
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits. 10.1 Inventory Working Capital Financing Agreement dated
June 29, 1995 between InaCom and IBM Credit Corporation.
10.2 Receivable Purchase Agreement dated June 28, 1995
between InaCom, InaCom Finance Corp. and certain
financial institutions.
27 Financial Data Schedule
b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ended July 1, 1995.
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
and by the undersigned hereunto duly authorized.
INACOM CORP.
David C. Guenthner
Executive Vice President and
Chief Financial Officer
Dated this 11th day of August, 1995.