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 September 30, 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 November 6, 1995 there were 10,012,568 common shares of the
registrant outstanding.
InaCom Corp. and Subsidiaries
Condensed and Consolidated Balance Sheets
(Unaudited)
(Amounts in Thousands)
September 30, December 31,
1995 1994
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ASSETS
Current assets:
Cash and cash equivalents $ 15,365 10,514
Accounts receivable, net 127,077 184,973
Inventories 293,448 228,652
Other current assets 7,050 6,097
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Total current assets 442,940 430,236
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Other assets, net 17,848 18,702
Cost in excess of net assets of business
acquired, net of accumulated amortization 24,938 26,081
Property and equipment, net 40,281 44,856
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$ 526,007 519,875
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 256,939 226,121
Short term borrowings
and current portion of long-term debt 66,167 96,710
Other current liabilities 32,537 28,646
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Total current liabilities 355,643 351,477
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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 $.10 par value. Authorized
30,000,000 shares; issued
10,040,000 shares 1,004 1,004
Additional paid-in capital 89,490 89,314
Retained earnings 54,433 47,167
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144,927 137,485
Less:
Cost of common shares in treasury of
27,432 in 1995 and 176,182 in 1994 227 1,533
Unearned restricted stock 478 362
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Total stockholders' equity 144,222 135,590
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$ 526,007 519,875
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InaCom Corp. and Subsidiaries
Condensed and Consolidated Statement of Operations
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
Sept. 30, Sept. 24, Sept. 30, Sept. 24,
1995 1994 1995 1994
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Revenues:
Independent reseller channel
and distribution facilities $ 264,201 235,991 774,448 663,723
Company-owned business centers 241,053 201,431 697,757 551,542
Other 28,000 21,748 71,914 51,842
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533,254 459,170 1,544,119 1,267,107
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Direct costs:
Independent reseller channel
and distribution facilities 256,399 227,680 749,636 635,598
Company-owned business centers 204,560 173,044 594,756 473,780
Other 21,476 16,666 54,604 38,548
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482,435 417,390 1,398,996 1,147,926
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Gross margin 50,819 41,780 145,123 119,181
Selling, general and
administrative expenses 42,724 37,890 122,601 118,902
------- ------ ------- -------
Operating income 8,095 3,890 22,522 279
Interest expense 3,727 3,019 10,207 8,336
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Earnings (loss) before income tax 4,368 871 12,315 (8,057)
Income tax expense (benefit) 1,791 357 5,049 (3,303)
------ ------ ----- -------
Net earnings (loss) $ 2,577 514 7,266 (4,754)
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Earnings (loss) per share $ .25 .05 .71 (.46)
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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)
THIRTY-NINE WEEKS ENDED
September 30, September 24,
1995 1994
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Cash flows from operating activities:
Net earnings (loss) $ 7,266 (4,754)
Adjustments to reconcile net earnings (loss)
to net cash (used in) provided by
operating activities:
Depreciation and amortization 14,623 14,492
Increase in accounts receivable (42,104) (323)
Increase in inventories (64,796) (23,884)
Increase in other current assets (953) (4,351)
Increase in accounts payable 30,818 28,949
Increase in other current liabilities 3,891 9,662
Decrease in long-term liabilities -- (1,102)
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Net cash (used in) provided by
operating activities (51,255) 18,689
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Cash flows from investing activities:
Additions to property and equipment (5,557) (13,037)
Proceeds from notes receivable 880 559
(Increase) decrease in other assets (2,925) 1,063
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Net cash used in investing activities (7,602) (11,415)
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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 (30,543) (24,599)
Proceeds from exercise of stock options 918 414
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Net cash provided by (used in)
financing activities 63,708 (7,185)
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Net increase in cash and cash equivalents 4,851 89
Cash and cash equivalents, beginning of the
period 10,514 9,672
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Cash and cash equivalents, end of the period $ 15,365 9,761
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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 nine months
ended September 30, 1995 are not necessarily indicative of the results
for the entire fiscal year ending December 30, 1995.
2. Accounts Receivable
The Company entered into an agreement in June 1995 (which agreement
was amended and restated in August 1995) 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 September
30, 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 September 30,
1995, the interest rate was 6.30%.
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 $ 10,179 8,558
Income taxes paid $ 4,564 632
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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 third quarter and first nine months of 1995 increased
$74 million or 16.1% and $277 million or 21.9% over the third quarter
and first nine months of 1994, respectively. Revenue growth resulted
primarily from the Company-owned business centers where revenue
increased $40 million (19.7%) and $146.2 million (26.5%) over the
third quarter and first nine months of 1994, respectively. Revenue
from the independent reseller channel increased $28.2 million (12.0%)
and $110.7 million (16.7%) over the third quarter and first nine
months of 1994, respectively. Revenue from other sources increased
$6.3 million (28.7%)and $20 million (38.7%) over the third quarter and
first nine months of 1994, respectively.
Revenues from the Company-owned business centers increased as a result
of broad based growth across all regional locations. Revenues from
the independent reseller channel increased as a result of 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 primarily as a result of the growth in voice and data
equipment sales as well as growth in product liquidation sales.
The sales backlog at September 30, 1995 was $35.9 million compared to
$50.5 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. 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 third quarter and first nine months of
1995 increased $9.0 million (21.6%) and $25.9 million (21.8%) over the
third quarter and first nine months of 1994, respectively. The gross
margin percentage was 9.5% for the third quarter of 1995 compared to
9.1% for the third quarter of 1994, and 9.4% for the first nine months
of 1995 versus 9.4% for the comparable period of 1994. The gross
margin percentage for the independent reseller channel was 3.0% in the
third quarter of 1995 compared to 3.5% for the third quarter of 1994,
and 3.2% for the first nine months of 1995 versus 4.2% for the
comparable period of 1994. The gross margin percentage for the
Company-owned business centers was 15.1% in the third quarter of 1995
compared to 14.1% in the third quarter of 1994, and 14.8% for the
first nine months of 1995 versus 14.1% for the comparable period of
1994. The gross margin percentage from other sources was 23.3% in the
third quarter of 1995 compared to 23.4% in the third quarter of 1994,
and 24.1% for the first nine months of 1995 versus 25.6% 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 first nine months
of 1995 increased $20.8 million (16.8%) over the first nine months of
1994. The gross margin percentage for the first nine months of 1995,
exclusive of non-recurring charges recognized in the second quarter of
1994, decreased 0.4 percentage points over the first nine months of
1994. The gross margin percentages for the independent reseller
channel for the first nine months of 1995, exclusive of non-recurring
charges recognized in the second quarter of 1994, decreased 1.4
percentage points over the first nine months of 1994. The gross
margin percentage for the Company-owned business centers for the first
nine months of 1995, exclusive of non-recurring charges recognized in
the second quarter of 1994, increased 0.2 percentage points over the
first nine months of 1994.
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
(Continued)
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 3.0% in the third quarter of 1995,
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 third quarter and first nine months of 1995
versus the comparable periods in 1994 is primarily 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 from other sources in the
third quarter and first nine 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 third
quarter and first nine months of 1995 increased $4.8 million (12.8%)
and $3.7 million (3.1%)over the third quarter and first nine months of
1994, respectively. SG&A as a percent of revenue was 8.0% in the
third quarter of 1995 compared to 8.3% in the third quarter of 1994,
and 7.9% for the first nine months of 1995 compared to 9.4% 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 first nine months of 1995 increased $5.7 million (4.9%) over the
first nine months of 1994. SG&A as a percent of revenue decreased 1.3
percentage points over the first nine months of 1994 excluding the
impact of non-recurring charges recognized in the second quarter of
1994.
The increase in SG&A for the third quarter and first nine months of
1995 versus the same periods in 1994 resulted primarily from increased
spending partially offset by an increase in market development funds
earned from various vendors and credited against SG&A. The increase
in spending is primarily a result of headcount increases and contract
labor expenses to support the increasing service revenue component of
the Company-owned business centers. The increase in vendor funds
earned resulted from attainment of program objectives outlined by
vendors primarily driven by higher revenues in the third quarter and
first nine months of 1995 compared to the same periods in 1994. The
decrease in SG&A as a percent of revenue for the third quarter and
first nine months of 1995 versus the same periods in 1994 resulted
from operational efficiencies achieved through investments in
distribution center automation and information systems.
Interest expense was $3.7 million in the third quarter of 1995
compared to $3.0 million in the third quarter of 1994, and $10.2
million for the nine months ended September 30, 1995 compared to $8.3
million for the same period in 1994.
Interest expense increased due to higher average borrowing rates.
Average daily borrowings for the third quarter of 1995 were $34.7
million less than the average borrowings for the same period in the
prior year, and $33.4 million less for the first nine months of 1995
than the average borrowings for the same period in 1994. The average
borrowing rate for the third quarter of 1995 increased approximately
1.4 percentage points from the same period in the prior year, and 1.9
percentage points for first nine months of 1995 versus the same period
in 1994.
The effective tax (benefit) rate was 41.0% for the third quarter and
first nine months of 1995 and 41.0% for the comparable periods in
1994.
Net earnings were $2.6 million or $.25 per share for the quarter ended
September 30, 1995 versus $514,000 or $.05 per share for the
corresponding period in 1994. The net earnings were $7.3 million or
$.71 per share for the nine months ending September 30, 1995 versus a
net loss of $4.8 million or $.46 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 first nine months of 1994 was
$553,000 or $.05 per share. The changes in net earnings result from
the factors discussed above.
Management's Discussion and Analysis
of
Financial Condition and Results of Operations
(Continued)
Liquidity and Capital Resources
- -------------------------------
The Company's primary sources of liquidity are provided through a
working capital financing agreement for $350.0 million and $30.3
million in two private placement notes.
The Company entered into a working capital financing agreement in June
1995 with IBM Credit Corporation and terminated previous revolving
credit facilities. The $350.0 million working capital financing
agreement expires June 29, 1998. At September 30, 1995, $59.5 million
was outstanding under the working capital line and the interest rate
was 7.74%.
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 September 30, 1995.
Long-term debt was 14.1% of total long-term debt and equity at
September 30, 1995 versus 18.6% at September 24, 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.
The Company entered into an agreement in June 1995 (which agreement
was amended and restated in August 1995) 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 September
30, 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 September 30,
1995, the interest rate was 6.30%
During the first nine months of 1995 the Company used $51.3 million of
cash in operations. Inventory increased by $64.8 million during the
first nine months with a portion of the increase financed through an
increase in accounts payable of $30.8 million. Inventory increased
during the first nine months of 1995 as a result of inventory
positions taken on 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 $42.1
million due to increased revenues.
Cash used in investing activities for the first nine months of 1995
totaled $7.6 million; $5.6 million resulted from additions to property
and equipment and $2.9 million from additions to other assets.
Proceeds of $900,000 were provided by the collection of notes.
Net cash provided by financing for the first nine months of 1995
totaled $63.7 of which $100 million was provided from the sale of
accounts receivable. The expended proceeds were used, in part, to reduce
long term and short term borrowings by $6.7 million and $30.5 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 Amended and Restated Receivable Purchase
Agreement dated as of August 21, 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 September 30, 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 13th day of November, 1995.