As filed with the Securities and Exchange Commission on September 30, 1997
Registration Statement No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
InaCom Corp.
(Exact name of registrant as specified in its charter)
Delaware 47-0681813
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
10810 Farnam Drive
Omaha, Nebraska 68154
(402) 392-3900
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
David C. Guenthner
10810 Farnam Drive
Omaha, Nebraska 68154
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
Copies to:
David L. Hefflinger Howard S. Lanznar
McGrath, North, Mullin & Kratz, P.C. Katten Muchin & Zavis
Suite 1400 525 West Monroe Street
One Central Park Plaza Suite 1600
Omaha, NE 68102 Chicago, IL 60661
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement. If the
securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Title of each class of securities to be reAmounteto be Proposed maximum Proposed maximum Amount of
registered(1) offering price per unit aggregate offering price Registration Fee(1)
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Debt Securities {
Preferred Stock {.................... (2) (2) $300,000,000 $90,909
Common Stock (3) {
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(1) The maximum aggregate offering price of Debt Securities, Preferred
Stock and Common Stock registered hereunder shall not exceed
$300,000,000.
(2) Not applicable pursuant to General Instruction II.D. of Form S-3
under the Securities Act of 1933, as amended.
(3) In addition, the Registrant is registering Common Stock that may be
issued from time to time upon conversion of convertible Debt
Securities or convertible Preferred Stock. Because this additional
Common Stock is issuable only upon the conversion of convertible
Debt Securities or convertible Preferred Stock, no registration fee
is required with respect to such Common Stock pursuant to the
provisions of Rule 457(i).
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________________, 1997
$50,000,000
InaCom Corp.
___% Convertible Subordinated Debentures due ________, 2004
-------------------
Interest on the Debentures is payable on ___ and ___ of each year
commencing ___, 1998. The Debentures are redeemable, in whole or in part, at the
option of the Company, at any time on or after _____, ____, at the redemption
prices set forth herein, plus accrued interest to the date of redemption. Each
holder of Debentures may require the Company to repurchase such holder's
Debentures, in whole or in part, in the event of a Change in Control (as defined
herein) at a purchase price equal to 100% of the principal amount of such
Debentures plus accrued interest to the date of repurchase for cash or, at the
Company's option, Common Stock (valued at 95% of the average closing prices for
the five trading days immediately preceding and including the third trading day
prior to the repurchase date).
The Debentures are convertible at any time, unless previously redeemed,
into shares of Common Stock of the Company, at a conversion rate of _______
shares per each $1,000 principal amount of Debentures (equivalent to a
conversion price of $___ per share) subject to adjustment under certain
circumstances. On September 26, 1997, the last reported sales price of the
Common Stock of the Company, which is listed under the symbol "ICO" on the New
York Stock Exchange, was $37.25 per share.
The Debentures are general unsecured obligations of the Company issued
under an indenture dated September 30, 1997 between the Company and Norwest Bank
Minnesota, National Association as supplemented by the first supplemental
indenture dated __________, 1997 and are subordinate in right of payment to all
Senior Indebtedness (as defined herein) of the Company. The subordinated
indenture will not restrict the incurrence of Senior Indebtedness or other
indebtedness by the Company or any of its subsidiaries.
The Debentures will be represented by one or more global securities
registered in the name of a nominee of The Depository Trust Company. Beneficial
interests in the Debentures will be shown on, and transfers thereof will be
effected only through, records maintained by the Depositary and its
participants. Except as described in this Prospectus Supplement, Debentures in
certificated form will not be issued in exchange for the global securities.
Concurrently with the offering of the Debentures hereby, the Company will
offer 3,000,000 shares of Common Stock (up to 3,450,000 shares if the
underwriters' over-allotment options are exercised) by a separate prospectus.
Neither offering is conditioned upon the consummation of the other offering. See
"Common Stock Offering".
See "Risk Factors" on pages S-7 to S-10 of this Prospectus Supplement
for a discussion of certain factors that should be considered by prospective
purchasers of the Debentures.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH
IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Initial Public Offering Underwriting Proceeds to
Price(1) Discount (2) Company (1)(3)
----------------------- ----------------- ---------------
Per Debenture........................................ ___% ___% ___%
Total(4)............................................. ___$ ___$ ___$
(1) Plus accrued interest, if any, from ______, 1997.
(2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(3) Before deduction of expenses estimated at $82,500 payable by the Company.
(4) The Company has granted the Underwriters an option exercisable for 30 days after the date hereof to purchase up to
$7,500,000 of additional Debentures, at the initial public offering price, less the underwriting discount. If such option
is exercised in full, the total initial public offering price, underwriting discount and proceeds to the Company will be
$__________, $__________ and $__________, respectively. See "Underwriting."
------------------------------------
The Debentures offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the Debentures will be ready for delivery in book-entry form only through
the facilities of the Depository Trust Company in New York, New York on or about
_________, 1997, against payment therefor in immediately available funds.
Goldman, Sachs & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
The date of this Prospectus Supplement is ________, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Photo collage of five photos in arrow shapes pointing clockwise at the adjacent
photo.
Caption: Needs Assessment and Technology Planning
Photo of two men and one woman discussing a company's information technology
needs.
Caption: Technology Procurement and Configuration
Photo of two technicians configuring computers at Inacom's Ontario, California
production facility.
Caption: Systems Integration and Systems Management
Photo of a technician working at a client company's technology nerve center.
Caption: Ongoing Systems Support and Distributed Support
Photo of a technician at Inacom's new Technology Services Center in Omaha,
Nebraska assisting a technology client.
Caption: Asset Management
Photo of a bar code and tracking system used to manage technology assets.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBENTURES OR THE
COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
S-2
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PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
more detailed information and Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus Supplement and Prospectus
or incorporated by reference. Except as otherwise indicated herein, all
information in this Prospectus Supplement and Prospectus assumes no exercise of
the Underwriters' over-allotment option.
The Company
InaCom Corp. (the "Company" or "Inacom") is a leading single source
provider of information technology products and technology management services
designed to enhance the productivity of information systems primarily for
Fortune 1000 clients. The Company offers a comprehensive range of value added
services to manage the entire information system life cycle including: (1) needs
assessment and technology planning, (2) technology procurement and
configuration, (3) systems integration and systems management, (4) ongoing
systems support and distributed support, and (5) asset management. Inacom's
expertise includes the integration of voice and data communications. Inacom
sells its products and services through a marketing network of 51 Company-owned
business centers throughout the United States that focus on serving large
corporations. The Company also has a network of approximately 1,000 value added
resellers that typically have a regional, industry, or specific product focus.
The Company has international affiliations in Europe, Asia, Central and South
America, the Caribbean, Middle East, Africa, Canada and Mexico to satisfy the
technology management needs of its multinational clients. Inacom is the largest
purchaser of IBM computer products and believes it is the second largest
purchaser of Compaq computer products worldwide.
Inacom's expertise in procurement, configuration and delivery of PC's,
peripherals and software from a wide range of major vendors enables the Company
to customize information systems to meet specific client needs. In addition,
Inacom provides its clients with numerous benefits including in-depth product
knowledge and experience, competitive pricing from its purchasing arrangements
and a wide array of services supporting client needs on an on-going basis.
Management believes that the Company's expertise in procuring,
configuring and delivering information technology products and providing
technology management services provides a strategic advantage in addressing
certain industry trends. In particular, businesses increasingly are seeking to
outsource the management and support of their information technology systems
with fewer providers. At the same time, the demand for cost-effective,
customized technology systems has led a number of manufacturers, including IBM,
Compaq and Hewlett-Packard, to move from "build-to-forecast" delivery systems to
"build-to-order" programs in which they ship computer components to a limited
number of qualified technology providers, including Inacom, for final assembly
and configuration. Management also believes that these trends will lead to
further consolidation in the highly fragmented technology management services
industry. As a result of the Company's experience in integrating acquired
businesses, management believes that the Company is well-positioned to take
advantage of strategic acquisition opportunities as they arise.
Inacom's earnings growth has been enhanced by its rapidly expanding
services business. In the first six months of fiscal 1997, computer services
provided 47.7% of net earnings, more than double the net earnings from the same
period in 1996. Computer products contributed 40.8% and communications products
and services provided 11.5% of net earnings in the same period. Inacom expects
that earnings from services will continue to grow more rapidly than earnings
from its other business segments given Inacom's broad offering of services to
its clients.
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals, Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are: (i) to leverage client
relationships to continue expanding higher-margin services revenues, (ii) to
capitalize on the trend toward build-to-order/configure-to-order systems, (iii)
to expand offerings and geographic coverage through strategic acquisitions, and
(iv) to capitalize on the convergence of data and voice communications.
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S-3
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Description of The Offering
The Debentures............................. $50,000,000 aggregate principal amount of ___% Convertible
Subordinated Debentures (the "Debentures") due _______, 2004 issued
under an indenture (the "Subordinated Indenture") dated September 30, 1997 between the
Company and Norwest Bank Minnesota, National Association as
trustee (the "Trustee")as supplemented by the first supplemental
indenture dated __________, 1997 (the "First Supplemental Indenture").
The Company has granted the Underwriters an option exercisable for
30 days after the date of this Prospectus Supplement to purchase up to
$7,500,000 of additional Debentures.
Interest Payment Dates..................... Semiannually on each _______ and _______ commencing
___________, 1998.
Maturity Date.............................. ________, 2004
Conversion Rights.......................... The holders of the Debentures are entitled at any time, subject to prior
redemption or repurchase, to convert the Debentures, or portions
thereof (if the portions are $1,000 or whole multiples thereof) into
shares of the Common Stock at the conversion rate of ____ shares per
$1,000 principal amount of Debentures (equivalent to a conversion per
share price of approximately $_______), subject to certain adjustments.
See "Description of Debentures - Conversion."
Optional Redemption........................ The Debentures are not redeemable by the Company prior to ______,
____. On or after ______, ____, the Debentures are redeemable on at
least 20 and not more than 60 days' notice at the option of the
Company, in whole or in part at any time, at the redemption prices set
forth herein, in each case together with accrued interest. See
"Description of Debentures - Optional Redemption."
Change in Control.......................... Upon a Change in Control, each holder of Debentures will have the
right (a "Repurchase Right") to require the Company to repurchase all
of such holder's Debentures, or a portion thereof (if the portions are
$1,000 or whole multiples thereof) at 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of
repurchase for cash or, at the Company's option, Common Stock
(valued at 95% of the average closing prices for the five trading days
immediately preceding and including the third trading day prior to the
repurchase date). See "Description of Debentures - Repurchase at
Option of Holders Upon Change in Control."
Subordination.............................. The payment of the principal of and premium, if any, and interest on
the Debentures is subordinated in right of payment to the prior
payment in full of all existing and future Senior Indebtedness (as
defined herein). The Indenture contains no limitations on the
incurrence of additional Senior Indebtedness or other indebtedness by
the Company. See "Description of Debentures - Subordination."
Use of Proceeds............................ To repay, in part, indebtedness and fund other capital requirements.
See "Use of Proceeds."
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S-4
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Events of Default.......................... An Event of Default with respect to the Debentures includes the
occurrence of any of the following: default for 30 days in payment of
interest; default in payment of principal at maturity, upon redemption
or exercise of a Repurchase Right or otherwise; default in payment on
Indebtedness (as defined herein) at maturity of at least $5,000,000
principal amount; default on Indebtedness which results in acceleration
of maturity of at least $5,000,000 principal amount of Indebtedness;
failure by the Company for 90 days after notice to it to comply in any
material respect with any of its other agreements in the Indenture or
the Debentures; and certain events of bankruptcy or insolvency. If an
Event of Default occurs and is continuing, the Trustee or the holders of
at least 25% in principal amount of the Debentures may declare all the
Debentures to be due and payable immediately. See "Description of
Debentures - Defaults and Remedies."
Listing.................................... The Debentures will not be listed on any securities exchange or quoted
on NASDAQ. The Underwriters advised the Company that they intend
to make a market in the Debentures but are not obligated to do so.
Any market in the Debentures which develops may be discontinued at
any time without notice.
Description of Common Stock
The Common Stock........................... _______________ shares of Common Stock are issuable upon
conversion of the Debentures. The Debentures are convertible into
Common Stock at a conversion price of $_________ per share, subject
to adjustment under certain circumstances. See "Description of Capital
Stock" in the Prospectus and "Description of
Debentures - Conversion."
Shares Outstanding......................... On September 26, 1997, there were 11,566,707 shares of Common
Stock outstanding.(1)
Shares Outstanding if all Debentures _____________ shares of Common Stock would be outstanding if all of
are Converted.............................. the Debentures were converted into shares of Common Stock,
including _____ shares of Common
Stock which are being offered
concurrently with the offering of
the Debentures.
Dividend Policy........................... The Company has never declared or paid a cash dividend to
stockholders. The Company's Board of Directors presently intend to
retain all earnings to finance the expansion of the Company's
operations and does not expect to authorize cash dividends in the
foreseeable future. Any payment of cash dividends in the future will
depend upon the Company's earnings, capital requirements and other
factors considered relevant by the Company's Board of Directors.
Certain of the Company's debt agreements restrict the amount of
dividends which may be paid.
Trading.................................... The Common Stock is traded on the New York Stock Exchange under
the symbol "ICO."
(1) Does not include (i) 1,132,948 additional shares reserved for issuance pursuant to currently outstanding
options under the Company's 1997, 1994 and 1990 stock plans and 1987
nonqualified stock option plan, (ii) 2,302,084 additional shares reserved for issuance pursuant to the conversion of the Company's
6% Convertible Subordinated Debentures due June 15, 2006 or (iii) such additional shares which will be reserved for issuance
pursuant to the conversion of the Debentures.
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S-5
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Summary Consolidated Financial Data
(in thousands, except per share data)
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ -----
Statement of Operations Data:
Revenues.................... $ 1,014,46 $ 1,545,22 $ 1,800,53 $ 2,200,344 $ 3,102,055 $ 1,411,941 $1,813,904
Earnings (loss) before income
taxes 17,959 19,693 (3,749) 19,833 31,719 12,566 20,262
Net earnings (loss)......... 10,734 11,975 (2,256) 11,707 18,733 7,414 11,954
Earnings (loss) per share,
fully diluted $ 1.25 $ 1.26 $ (0.22) $ 1.14 $ 1.64 $ 0.71 $ 0.94
Weighted average shares
outstanding, fully diluted 8,566 9,500 10,300 10,300 12,000 10,500 13,800
fully diluted...............
June 28, 1997
As As Adjusted
Balance Sheet Data: Actual Adjusted(1) Pro Forma(2)
Working capital................................................................... $ 81,869 $ 130,119 $ 235,723
Total assets...................................................................... 944,912 946,662 980,516
Long-term debt.................................................................... 55,250 105,250 105,250
Stockholders' equity.............................................................. 207,012 207,012 312,616
(1) As adjusted to give effect to the sale of Debentures offered hereby.
(2) As adjusted to give effect to the sale of Debentures offered hereby and the
sale of the Common Stock, as described in the following paragraph, and the
application of the estimated net proceeds of both offerings.
See "Use of Proceeds".
Common Stock Offering
Concurrently with the offering, the Company is offering, by separate
prospectus, 3,000,000 shares of Common Stock (up to 3,450,000 shares if the
underwriters' over-allotment option is exercised in full). The consummation of
the offering of the Debentures made hereby is not conditioned upon the
consummation of the Common Stock offering.
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S-6
RISK FACTORS
The Prospectus and this Prospectus Supplement, including documents
incorporated by reference herein, contain certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. Such statements reflect the current view
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including factors described in "Risk Factors"
herein and in documents incorporated herein by reference. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
believed, estimated or expected.
Dependence Upon Key Vendors
Inacom's business is dependent in large measure upon its relationship
with key vendors. A substantial portion of Inacom's computer products revenue is
derived from the sales of the products of key vendors, including Compaq, IBM and
Hewlett-Packard. During the fiscal year ended December 28, 1996, sales of
Compaq, IBM and Hewlett-Packard products accounted for approximately 26%, 24%
and 15%, respectively, of the Company's revenues. Inacom derives a substantial
portion of its communications products and services revenue from the sale of
Lucent Technologies products and AT&T services. Although Inacom considers its
relationships with its key vendors to be good, there can be no assurance that
these relationships will continue as presently in effect or that changes in
marketing approach by one or more such key vendors and other suppliers would not
adversely affect Inacom. Inacom's agreements with these vendors are on a
non-exclusive basis and may be terminated by the vendors on notice typically
ranging from 30 to 90 days. Termination of, or a material change to, or a
nonrenewal of Inacom's agreements with Compaq, IBM and Hewlett-Packard, a
material decrease in the level of marketing development programs offered by
computer vendors, or an insufficient or interrupted supply of vendors' product
would have a material adverse effect on Inacom's business. See "Business --
Products and Vendors."
Impact of Vendor Incentive Funds
The key vendors of Inacom provide various incentives for promoting and
marketing their product offerings. Funds or credits received by Inacom are based
either on the sales of the vendor's products through the independent reseller
and Inacom-owned channels, or on Inacom's purchases from the respective vendor.
The three major forms of vendor incentives received by Inacom are co-operative
funds, market development funds and vendor rebates. The funds or credits are
earned through performance of specific marketing programs or upon completion of
objectives outlined by the vendors. These funds or credits from Inacom's primary
vendors typically range from 1% to 5% of purchases by Inacom. A material
decrease in the level of vendor incentive funding or credits would have a
material adverse effect on Inacom's business. See "Business -- Products and
Vendors."
Inventory Management Risks
The personal computer industry is characterized by rapid product
improvement and technological change resulting in relatively short product life
cycles and rapid product obsolescence, which can place inventory at considerable
valuation risk. Inacom's information technology suppliers generally provide
price protection intended to reduce the risk of inventory devaluation. However,
many of these suppliers have announced plans to reduce the number of days for
which they will provide price protection. There can be no assurance that vendors
will continue such policies or that unforeseen new product developments and
related inventory obsolescence will not materially adversely affect Inacom's
business.
S-7
Build-to-Order Delivery Model
The system used by major manufacturers, such as IBM, Compaq and
Hewlett-Packard to deliver computer systems to business clients through
technology providers such as Inacom is changing from a build-to-forecast model
to a build-to-order model. See "Business - Industry". The potential advantages
to technology providers such as Inacom from such a system -- reduced inventory
requirements, improved margins and market share gains -- involve potential
disadvantages including a decrease in the number of days of price protection
available from the manufacturers and the requirement that Inacom meet strict
manufacturer final assembly qualification standards. The failure of Inacom to
meet the manufacturer qualification standards, or the inability of Inacom to
manage its inventory to levels to meet client demands and within the
manufacturer's price protection limits, could have a material adverse effect on
Inacom's business.
Dependence Upon Key Management and Technical Personnel
Inacom's success depends to a significant extent on its ability to
attract and retain key personnel. Inacom is particularly dependent on its senior
management team and technical personnel. Inacom's strategy for growth in the
sale of computer services and communication services depends on its ability to
attract and retain qualified technical personnel, including systems engineers
and communications specialists. Competition for technical personnel is intense
and no assurance can be given that Inacom will be able to recruit and retain
such personnel. The failure to recruit and retain senior management and
technical personnel could have a material adverse effect on Inacom's business.
Management of Expanding Operations and Increased Service Focus
The Company's growth resulting from expanding operations and its increased
focus on the complete life cycle technological needs of its business clients
places significant demands on the Company's management, operational and
technical resources. Such growth and increased life cycle service focus are
expected to continue to challenge the Company's sales, marketing, technical and
support personnel and senior management. The Company's future performance will
depend in part on its ability to manage expanding operations and to adapt its
operational systems to respond to changes in its business. In particular, the
Company's success will depend upon its key management and technical personnel.
See "Dependence Upon Key Management and Technical Personnel" above. The failure
of the Company to effectively manage its growth and increased life cycle service
focus effectively or to train its technical field personnel could have a
material adverse effect on Inacom's business.
Funding Requirements; Interest Rate Sensitivity
Inacom's business requires significant working capital to finance
product inventory and accounts receivable. Inacom has funded its inventory and
working capital requirements through an inventory and working capital financing
agreement, a revolving credit facility and the public sale of debentures. The
borrowings under these agreements typically bear a floating rate of interest.
Due to the Company's significant working capital needs, an increase in interest
rates could have a material adverse effect on Inacom's results of operation.
There can be no assurance that sufficient equity or debt financing will be
available on terms acceptable to Inacom or that Inacom will be able to refinance
its existing indebtedness. The inability of Inacom to refinance its existing
indebtedness or to obtain a sufficient amount of alternative financing would
have a material adverse effect on Inacom's business.
Risks of Financial Leverage
The Company's business requires significant working capital and the
primary sources of such working capital are provided through an inventory and
working capital financing agreement, the $55.25 million in aggregate principal
amount of 6% convertible subordinated debentures issued in June 1996, and a
revolving credit facility of $40.0 million. On June 28, 1997, $80.0 million was
outstanding under the working capital portion of the inventory and working
capital financing agreement and the interest rate was 7.5% based on three-month
LIBOR. The inventory and working capital agreement expires in June 1998. The
debentures are unsecured subordinated debt
S-8
of the Company. On June 28, 1997, $40.0 million was outstanding under the
revolving credit facility and the interest rate was 6.99% based on three-month
LIBOR. The revolving credit facility expires in February 1998. The degree to
which the Company is leveraged could have important consequences to holders of
the Common Stock, including the following: (i) the Company's ability to obtain
other financing in the future may be impaired; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness; and (iii) a high degree of leverage
may make the Company more vulnerable to economic downturns and may limit the
ability to withstand competitive pressures. The Company's ability to make
scheduled payments on or, to the extent not restricted pursuant to the terms
thereof, to refinance its indebtedness depends on its financial and operating
performance, which is subject to prevailing economic conditions and to
financial, business and other factors beyond its control.
Competition
All aspects of the technology management services industry are highly
competitive. The technology management services industry continues to experience
a significant amount of consolidation. In the future Inacom may face fewer but
larger and better financed competitors as a consequence of such consolidation.
Inacom competes for potential clients, including national accounts, with
numerous resellers, distributors and service providers. Several computer
manufacturers have expanded their channels of delivery, pricing and product
positioning and compete with Inacom's marketing network for potential clients.
Other competitors operate mail-order or discount stores offering clones of major
vendor products. Inacom also competes with computer technology providers in the
recruitment and retention of franchisees and independently-owned resellers.
Inacom competes in the computer services division with a large number of service
providers, including IBM through its Global Services division, Andersen
Consulting, EDS, CompuCom Systems, ENTEX, GE Capital Technology Management
Services, IKON Office Solutions and Vanstar Corp. Competition in the
communications products and services industry is also intense, and includes
entities which are also significant vendors of Inacom, such as Lucent
Technologies and AT&T. Certain competitors and manufacturers are substantially
larger than Inacom and have greater financial, technical, service and marketing
resources. The level of future sales and earnings achieved by Inacom in any
period may be adversely affected by a number of competitive factors, including
an increase in direct sales by vendors to independent resellers and/or clients
and increased computer client preference for mail-order or discount store
purchases of clones of major vendor products.
Acquisitions
Inacom's strategy includes effecting acquisitions and strategic
relationships in selected geographic market and service areas. Acquisitions
involve a number of special risks, including the incorporation of acquired
products and services into Inacom's offerings, the potential loss of key
employees of the acquired business, the valuation of the acquired business, the
incurrence of additional debt and the financial impact of goodwill amortization.
Inacom expects to issue equity securities to consummate certain acquisitions,
which may cause dilution to current stockholders. No assurance can be given that
Inacom will have adequate resources to consummate acquisitions, integrate the
acquired businesses or that any such acquisitions will be successful in
enhancing Inacom's business.
Dependence on Information Systems
The Company depends on a variety of information systems to provide it
with a competitive advantage. Although the Company has not in the past
experienced significant failures or down time of its proprietary procurement and
delivery system or any of its other information systems, any such failure or
significant down time could prevent the Company from taking orders and/or
shipping product and could prevent clients from accessing price and product
availability information from the Company. In such event, the Company could be
at a severe disadvantage in determining appropriate product pricing or the
adequacy of inventory levels or in reacting to rapidly changing market
conditions. A failure of the Company's information systems which impacts any of
these functions could have a material adverse effect on the Company's business.
In addition, the inability of the Company to attract and retain the
highly-skilled personnel required to implement, maintain, and operate its
centralized information
S-9
processing system and the Company's other information systems could have a
material adverse effect on the Company's business.
Gross Margin Risks
Gross margins from the sale of computer products have declined over the
past several years as a result of computer product price reductions and intense
competition. Inacom has responded by reducing operating expenses as a percentage
of revenue and by focusing on sales of higher-margin computer services and
communication services. There can be no assurance that gross margins for
computer products will not continue to decline or that Inacom will be successful
in reducing operating expenses as a percentage of revenue. Furthermore, there
can be no assurance that gross margins for computer services and communications
services will not also decline or that Inacom will be able to continue to
successfully grow and compete in such service markets.
Certain Anti-Takeover Effects
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may be deemed to have anti-takeover effects. The Company's
Certificate of Incorporation provides that the Board of Directors may issue
additional shares of Common Stock or establish one or more classes or a series
of Preferred Stock with such designations, relative voting rights, dividend
rights, liquidation and other rights that the Board of Directors fixes without
stockholder approval. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law which
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
See "Description of Capital -- Preferred Stock" and "Description of Capital
Stock -- Section 203 of the Delaware General Corporation Law" in the Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Debentures and
Common Stock being offered concurrently (assuming an offering price of $37.25
per share, the last reported share price of the Common Stock on the NYSE on
September 26, 1997) are expected to be $48,250,000 and $105,604,000,
respectively ($55,488,000 and $121,444,000, respectively if the Underwriters'
over-allotment options for the offerings are exercised in full), after deducting
the discounts and commissions and the estimated offering expenses payable by the
Company. The Company currently anticipates that approximately $120,000,000 of
such net proceeds will be used to repay, in part, borrowings under the Company's
short-term revolving lines of credit which borrowings are made for working
capital purposes and can be reborrowed at any time. The reduction in short-term
borrowings will strengthen the Company's balance sheet and provide the Company
with additional debt capacity to grow its business internally and through
acquisitions. Borrowings outstanding under such lines of credit were $80 million
and $40 million at June 28, 1997 and the annual interest rate was 7.5% and
6.99%, respectively. The balance of the net proceeds will be used for general
corporate purposes. See "Capitalization."
S-10
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Prior to September 12, 1997, the Common Stock traded in the
over-the-counter market and was quoted on the NASDAQ National Market under the
symbol "INAC". The Common Stock commenced trading on the NYSE on September 12,
1997, under the symbol "ICO." The following table sets forth the quarterly high
and low sales prices for the Common Stock as reported by the NASDAQ prior to
September 12, 1997 and by the NYSE thereafter.
........................................ High Low
---------- -------
Fiscal Year Ended December 30, 1995
First Quarter................................ $ 9.38 $ 7.00
Second Quarter............................... 14.25 8.25
Third Quarter................................ 15.25 12.25
Fourth Quarter............................... 15.12 9.50
Fiscal Year Ended December 28, 1996
First Quarter................................ $ 18.50 $13.25
Second Quarter .............................. 24.25 15.38
Third Quarter................................ 35.88 15.38
Fourth Quarter............................... 39.25 29.50
Fiscal Year Ending December 27, 1997
First Quarter................................ $ 40.63 $20.63
Second Quarter............................... 32.88 20.00
Third Quarter................................ 37.63 29.75
Fourth Quarter (through October __, 1997).... [--] [--]
On September, 26, 1997 the last reported sales price of the Common
Stock on the NYSE was $37.25. As of August 1, 1997 the Company estimates that
there were approximately 5,300 beneficial holders of the Company's Common Stock.
The Company has never declared or paid a cash dividend to stockholders.
The Company's Board of Directors presently intends to retain all earnings to
finance the expansion of the Company's operations and does not expect to
authorize cash dividends in the foreseeable future. Any payment of cash
dividends in the future will depend upon the Company's earnings, capital
requirements and other factors considered relevant by the Company's Board of
Directors. Certain of the Company's debt agreements restrict the amount of
dividends which may be paid by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Liquidity and
Capital Resources."
S-11
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 28, 1997, and as adjusted to give effect to the application of estimated
net proceeds of $105,604,000 from the sale by the Company of the Common Stock
and $48,250,000 from the sale by the Company of the Debentures. The information
set forth below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
June 28, 1997
As Adjusted
Actual As Adjusted(1) Pro Forma(2)
(in thousands)
Cash and cash equivalent...................................... $ 30,720 $ 30,720 $ 64,574
============ ============ =============
Short-term debt............................................... $ 120,000 $ 71,750 --
============ ============ =============
Long-term debt................................................ $ 55,250 $ 105,250 $ 105,250
Stockholders' equity:
Capital stock:
Class A preferred stock, $1 par value;
authorized 1,000,000 shares; none issued............... -- -- --
Common stock, $.10 par value; authorized
30,000,000 shares; 11,537,315 shares
issued and outstanding; 14,537,315 shares
issued and outstanding as adjusted pro forma(3)........ 1,153 1,153 1,453
Additional paid-in capital................................ 116,298 116,298 221,602
Retained earnings......................................... 89,561 89,561 89,561
------------ ------------ -------------
Total stockholders' equity............................. 207,012 207,012 312,616
------------ ------------ -------------
Total capitalization................................ $ 262,262 $ 312,262 $ 417,866
============ ============ =============
(1) As adjusted to give effect to the sale of the Debentures offered hereby.
(2) Assumes consummation of the offering of the Common Stock concurrently with
the consummation of the offering of Debentures.
(3) Does not include (i) 1,132,948 additional shares reserved for issuance
pursuant to currently outstanding options under the Company's 1997, 1994 and
1990 stock plans and 1987 nonqualified stock option plan, (ii) 2,302,084
additional shares reserved for issuance pursuant to the conversion of the
Company's 6% Convertible Subordinated Debentures due June 15, 2006 or (iii) such
additional shares which will be reserved for issuance pursuant to the conversion
of the Debentures.
S-12
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data under the captions "Statement
of Operations Data" and "Balance Sheet Data" are derived from the Company's
Annual Reports on Form 10-K for each of the years ended December 26, 1992,
December 25, 1993, December 31, 1994, December 30, 1995 and December 28, 1996
which have been audited by KPMG Peat Marwick LLP, independent public
accountants, and such data as of and for the twenty-six weeks ended June 29,
1996 and June 28, 1997 have been derived from the Company's unaudited Quarterly
Reports on Form 10-Q. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and the independent
auditors' report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Selected Consolidated Financial Data
(in thousands, except per share data)
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
--------------------------------------------------------------------------------
Statement of Operations Data:
Revenues...................... $1,014,466 $1,545,227 $1,800,539 $2,200,344 $3,102,055 $1,411,941 $1,813,904
Direct costs.................. 895,276 1,375,796 1,631,820 1,996,538 2,818,696 1,286,627 1,631,787
---------- --------- --------- --------- ---------- ---------- ---------
Gross margin.................. 119,190 169,431 168,719 203,806 283,359 125,314 182,117
Selling, general and administrative
expenses.................... 93,267 141,142 160,437 169,338 231,235 102,829 147,671
---------- --------- --------- --------- ---------- ---------- ---------
Operating income.............. 25,923 28,289 8,282 34,468 52,124 22,485 34,446
Interest expense.............. 7,964 8,596 12,031 14,635 20,405 9,919 14,184
---------- --------- --------- --------- ---------- ---------- ---------
Earnings (loss) before income taxes. 17,959 19,693 (3,749) 19,833 31,719 12,566 20,262
Income tax expense (benefit).. 7,225 7,947 (1,493) 8,126 12,986 5,152 8,308
Cumulative effect of change in
accounting for taxes........ -- 229 -- -- -- -- --
---------- --------- --------- --------- ---------- ---------- ---------
Net earnings (loss)........... $ 10,734 $ 11,975 $ (2,256) $ 11,707 $ 18,733 $ 7,414 $ 11,954
========== ========= ========= ========= ========== ========== =========
Earnings (loss) per share, fully
diluted. $1.25 $1.26 $ (0.22) $1.14 $1.64 $.71 $.94
========== ===== ======== ========= ========== ========== =========
Weighted average shares
outstanding, fully diluted.. 8,566 9,500 10,300 10,300 12,000 10,500 13,800
========== ========= ========= ========= ========== ========== =========
Balance Sheet Data:
Working capital............... $ 65,901 $ 67,936 $ 78,759 $ 90,940 $ 100,303 $ 135,408 $ 81,869
Total assets.................. 288,365 456,894 519,875 624,238 847,600 631,854 944,912
Long-term debt................ 36,800 20,000 30,333 23,667 55,250 68,850 55,250
Stockholders' equity.......... $ 101,275 $ 136,491 $ 135,590 $ 148,775 $ 176,830 $ 158,313 $ 207,012
Certain Data As A Percentage of Revenues
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
-------------------------------------------- -------- ---------- ----
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs....................... 88.3 89.0 90.6 90.7 90.8 91.1 90.0
------ ------ ------- ------ ------- ------ ------
Gross margin....................... 11.7 11.0 9.4 9.3 9.2 8.9 10.0
Selling, general and administrative
expenses. 9.2 9.1 8.9 7.7 7.5 7.3 8.1
--- ---------- --------- ---------- ------------ ---------- ---------
Operating income................... 2.5 1.9 0.5 1.6 1.7 1.6 1.9
Interest expense................... 0.8 0.6 0.7 0.7 0.7 0.7 0.8
------ ------ ------- ------ ------- ------ ------
Earnings (loss) before income tax.. 1.7 1.3 (0.2) 0.9 1.0 0.9 1.1
Income tax expense (benefit)....... 0.7 0.5 (0.1) 0.4 0.4 0.4 0.4
------ ------ ----- ------ ------- ------ ------
Net earnings (loss)................ 1.0% 0.8% (0.1)% 0.5% 0.6% 0.5% 0.7%
====== ====== ===== ====== ======= ====== ======
S-13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Inacom is a leading single source provider of information technology
products and technology management services designed to enhance the productivity
of information systems, primarily for Fortune 1000 clients. The Company offers a
comprehensive range of value added services to manage the entire information
system life cycle including: (1) needs assessment and technology planning, (2)
technology procurement and configuration, (3) systems integration and systems
management, (4) ongoing systems support and distributed support, and (5) asset
management.
The Company generates revenue, gross margin and earnings by providing
products and services to its clients throughout the life cycle of a computer
system. These revenues, gross margin and earnings are comprised of three main
classifications; (i) computer product sales, (ii) computer services and (iii)
communication products and services and are provided through the Company's
marketing network which consists of Company-owned business centers and
independent value added resellers. Computer product sales are derived from the
sale of microcomputer systems, workstations and related products. Computer
services are derived from the sale of technology procurement services, system
integration services and system support services. Communication products and
services are derived from the sale of voice and data equipment, long distance
services and convergence technology through the Company's communications
division.
The Company recognizes revenue from computer product sales upon
shipment to its clients. Revenues from consulting and other computer services
are recognized as the Company performs the services. Revenues from maintenance
and extended warranty agreements are recognized ratably over the term of the
agreement. Extended warranty costs are accounted for on an accrual basis and are
recognized under the sales method.
Results of Operations
The following table sets forth, for the indicated periods, revenues,
gross margins and net earnings of the Company segmented by the three main
classifications.
Summary of Operating Results
(in thousands)
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28, June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Revenues:
Computer products....... $1,680,397 $2,047,215 $2,885,019 $1,316,307 $1,657,705 $ 718,585 $ 884,952
Computer services....... 85,406 95,476 136,888 58,340 108,238 30,201 60,607
Communication products
and services.......... 34,736 57,653 80,148 37,294 47,961 21,074 26,655
---------- ---------- ---------- ---------- --------- ---------- ---------
Total......... $1,800,539 $2,200,344 $3,102,055 $1,411,941 $1,813,904 $ 769,860 $ 972,214
========== ========== ========== ========== ========== ========== =========
Gross margin:
Computer products....... $ 113,797 $ 122,386 $ 162,651 $ 74,316 $ 92,080 $ 40,825 $ 48,076
Computer services....... 52,506 67,599 103,228 42,790 79,858 22,854 45,726
Communication products
and services.......... 7,516 13,821 17,480 8,208 10,179 4,454 5,072
---------- ---------- ---------- ---------- --------- ---------- ---------
Total......... $ 173,819 $ 203,806 $ 283,359 $ 125,314 $ 182,117 $ 68,133 $ 98,874
========== ========== ========== ========== ========= ========== =========
Net earnings (loss):
Computer products....... $ (659) $ 5,418 $ 9,703 $ 4,102 $ 4,883 $ 2,545 $ 2,550
Computer services....... 2,527 5,272 7,381 2,796 5,691 1,669 3,464
Communication products
and services.......... 77 1,017 1,649 516 1,380 210 695
---------- ---------- ---------- ---------- --------- ---------- ---------
Total......... $ 1,945 $ 11,707 $ 18,733 $ 7,414 $ 11,954 $ 4,424 $ 6,709
========== ========== ========== ========== ========= ========== =========
(1) Gross margin and net earnings exclude the impact of non-recurring charges
recognized in the second quarter of 1994. (2) Net earnings include the impact of
non-recurring charges of $991,000 in the fourth quarter of 1996.
S-14
The following table sets forth, for the indicated periods, the
percentage mix of revenue and net earnings of the Company by the three main
classifications.
Percentage Mix of Revenues and Net Earnings
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28 June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Revenues:
Computer products....... 93.3% 93.1% 93.0% 93.3% 91.4% 93.4% 91.1%
Computer services....... 4.7 4.3 4.4 4.1 6.0 3.9 6.2
Communication products
and services.......... 2.0 2.6 2.6 2.6 2.6 2.7 2.7
------- ------- ------- -------- -------- -------- -----
Total......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ======== ======== =====
Net earnings:
Computer products....... (33.9)% 46.3% 51.8% 55.3% 40.8% 57.5% 38.0%
Computer services....... 129.9 45.0 39.4 37.7 47.7 37.7 51.6
Communication products
and services.......... 4.0 8.7 8.8 7.0 11.5 4.8 10.4
------- ------- ------- -------- -------- -------- -----
Total......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ======== ======== =====
The following table sets forth, for the indicated periods, the gross margin
percentage of the three main classifications and the consolidated gross margin
percentage.
Gross Margin Percentages
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28 June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Gross margin:
Computer products....... 6.8% 6.0% 5.6% 5.7% 5.6% 5.7% 5.4%
Computer services....... 61.5 70.8 75.4 73.4 73.8 75.7 75.5
Communication products
and services.......... 21.6 24.0 21.8 22.0 21.2 21.1 19.0
Consolidated gross margin 9.7 9.3 9.1 8.9 10.0 8.9 10.2
(1) Gross margin and net earnings exclude the impact of non-recurring charges
recognized in the second quarter of 1994.
(2) Net earnings include the impact of non-recurring charges of $991,000 in the
fourth quarter of 1996.
Second Quarter and First Six Months of 1997
Compared to Second Quarter and First Six Months of 1996
Revenues. Revenues for the second quarter and first six months of 1997
increased $202.4 million or 26.3% and $402.0 million or 28.5% over the second
quarter and first six months of 1996, respectively. Revenue growth resulted
primarily from computer product sales which increased $166.4 million or 23.2%
and $341.4 million or 25.9% over the second quarter and first six months of
1996, respectively. Revenues from computer services increased $30.4 million or
100.7% and $49.9 million or 85.5% over the second quarter and first six months
of 1996, respectively. Revenues from communication products and services
increased $5.6 million or 26.5% and $10.7 million or 28.6% over the second
quarter and first six months of 1996, respectively.
Revenues increased primarily as a result of an increase in products
shipped directly to the end-user client, overall industry growth and the
acquisitions completed by the Company during 1996 and 1997. The increase in
revenues related to the acquisitions was approximately $27.5 million and $52.3
million over the second quarter and first six months of 1996, respectively. The
increase in computer product sales resulted primarily from an increase in sales
through the Company-owned business centers ($129.1 million or 39.2% and $222.2
million or 35.9% over the second quarter and first six months of 1996,
respectively) and through an increase in sales through the
S-15
independent reseller channel ($49.0 million or 12.0% and $136.1 million or 18.7%
over the second quarter and first six months of 1996, respectively).
Revenues from computer services increased as a result of increased
sales efforts for such service offerings, the inclusion of these services with
increasing computer product sales and the recent acquisitions completed by the
Company. The increase in computer services sales resulted primarily from an
increase in sales through the Company-owned business centers ($15.0 million or
65.4% and $24.8 million or 55.9% over the second quarter and first six months of
1996, respectively). The increase in computer services revenues related to
acquisitions was approximately $9.4 million and $13.4 million over the second
quarter and first six months of 1996, respectively. Revenues from communication
products and services increased as a result of broad based growth from the
communications product offerings.
Gross Margins. The increase in the Company's gross margin percentages
for the first six months of 1997 versus the same period in 1996 was primarily a
result of the increase in mix of higher-margin computer services and
communications products and services versus lower-margin computer products. The
decrease in gross margin percentage for computer products resulted primarily
from a decrease in the margin percentage on computer product sales through the
Company-owned business centers and the independent reseller channel in the first
six months of 1997 versus the same period in 1996. The increase in gross margin
percentage for computer services resulted from an increase in the mix of
services to include more higher-margin systems integration services versus
support and technology procurement services. The decrease in gross margin
percentage for the communication products and services resulted from an increase
in mix of revenues to include more lower-margin communications product sales as
compared to higher-margin long distance and non-product services.
Selling, General And Administrative Expenses. Selling, general and
administrative (SG&A) expenses for the second quarter and first six months of
1997 increased $24.8 million or 44.6% and $44.8 million or 43.6% over the second
quarter and first six months of 1996, respectively. SG&A as a percentage of
revenue was 8.3% in the second quarter of 1997 versus 7.2% in the second quarter
of 1996, and 8.1% for the first six months of 1997 versus 7.3% for the first six
months of 1996. The increase in spending and the related increase in SG&A as a
percentage of revenues resulted primarily from the costs of handling the
increased services revenues. During the third quarter of 1996 the Company
continued to invest in the infrastructure by opening a center in Ontario,
California to facilitate "build-to-order" and cost-effective configuration and
delivery to the Company's clients. The Company incurred additional costs during
the second quarter and first six months of 1997 related to integrating the
acquisitions completed in the fourth quarter of 1996 and acquisitions completed
in the first and second quarters of 1997. The increase in SG&A related to
acquisitions was approximately $6.1 million and $7.5 million over the second
quarter and first six months of 1996, respectively.
Interest Expense. Interest expense for the second quarter and first six
months of 1997 was $7.1 million and $14.2 million, respectively, versus interest
expense for the second quarter and first six months of 1996 of $5.0 million and
$9.9 million, respectively. Interest expense increased primarily due to higher
average daily borrowings. Average daily borrowings for the second quarter and
first six months of 1997 were $124.1 million and $118.3 million more than the
average borrowings for the second quarter and first six months of 1996,
respectively. The weighted average borrowing rate for the second quarter of 1997
increased approximately 6 basis points over the second quarter of 1996 and
decreased 15 basis points for the first six months of 1997 versus the first six
months of 1996. The increase in the average daily borrowings resulted primarily
from financing an increase in accounts receivable resulting from the increase in
revenues, and an increase in inventory levels. The weighted average daily
borrowing interest rate increased for the second quarter of 1997 primarily due
to an increase in LIBOR rates in 1997 versus 1996. The average daily borrowing
interest rate decreased for the first six months of 1997 versus the same period
in 1996 primarily because the Company sold an additional $100 million of
accounts receivable in January 1997, which as of June 28, 1997 had an interest
rate of 6.09%, and issued $55.25 million of 6% convertible subordinated
debentures in June 1996 (see "Liquidity and Capital Resources"). The funding
from the sale of $100 million in accounts receivable and the issuance of $55.25
million of convertible bonds was used to decrease the borrowings outstanding on
the inventory and working capital credit line which on June 28, 1997 had an
interest rate of 7.5%.
S-16
Net Earnings. Net earnings for the quarter ending June 28, 1997
increased 51.7% to $6.7 million compared with net earnings of $4.4 million for
the second quarter of 1996. Net earnings per share for the second quarter of
1997 increased to $.52 per fully diluted share from the $.42 per fully diluted
share reported for the same period in 1996. Net earnings for the first six
months of 1997 increased 61.2% to $12.0 million compared with net earnings of
$7.4 million for the first six months of 1996. Net earnings per share for the
first six months of 1997 increased to $.94 per fully diluted share from the $.71
per fully diluted share reported for the same period in 1996. Net earnings from
computer services for the quarter ending June 28, 1997 increased 107.5% to $3.5
million compared with net earnings from computer services of $1.7 million for
the same period in 1996 and constituted 51.6% in the aggregate of net earnings
of the Company for such period.
1996 Compared to 1995
Revenues. Revenues for 1996 increased $901.7 million or 41.0% to $3.1
billion when comparing the fiscal year ended December 28, 1996 with the fiscal
year ended December 30, 1995. Revenue growth resulted primarily from computer
product sales which increased $837.8 million or 40.9% during 1996. Revenues from
computer services increased $41.4 million or 43.4% over 1995. Revenues from
communication products and services increased $22.5 million or 39.0% in 1996.
Revenues increased primarily as a result of an increase in products
shipped directly to the end-user client, overall industry growth, the sale of
products to new independent resellers and the acquisitions completed by the
Company-owned business centers. The increase in revenues related to the
acquisitions was approximately $49.4 million for 1996. The increase in computer
product sales resulted from an increase in sales through the independent
reseller channel ($563.5 million or 50.9% over 1995) and through an increase in
sales through the Company-owned business centers ($291.7 million or 29.4% over
1995). Revenues from computer services increased as a result of increased sales
efforts for such service offerings and the inclusion of these services with
increasing computer product sales. Revenues from communication products and
services increased as a result of broad based growth from the communications
product and service offerings.
Gross Margins. The decrease in the Company's gross margin percentage
for 1996 is primarily a result of the decrease in the gross margin percentage on
computer products, which resulted primarily from a greater proportion of
lower-margin independent reseller channel sales in 1996 versus higher-margin
computer product sales in the Company-owned business centers.
The increase in gross margin percentage for computer services resulted
from an increase in the mix of services to include more higher-margin systems
integration services versus the support and technology procurement services. The
decrease in gross margin percentage for the communication products and services
resulted from an increase in mix of revenues which included more lower-margin
communications product sales as compared to the higher-margin long distance and
non-product services.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased $61.9 million or 36.6% in 1996. SG&A as
a percentage of revenue was 7.5% in 1996 versus 7.7% in 1995. Excluding the
impact of non-recurring charges recognized in the fourth quarter of 1996, SG&A
expenses increased $60.2 million or 35.6% in 1996. SG&A as a percentage of
revenue, excluding the impact of the non-recurring charges recognized in the
fourth quarter of 1996, was 7.4% in 1996 versus 7.7% in 1995.
The increase in spending resulted primarily from the costs of handling
the increased product, services and communications revenues. The Company also
continued to invest in the infrastructure by opening a center in Ontario,
California to enable "build-to-order" configuration and delivery, during the
third quarter of 1996. The Company incurred additional costs during the year
related to integrating the current year's acquisitions. The decrease in SG&A as
a percentage of revenue resulted from leverage achieved through operational
efficiencies resulting from current and prior period investments in distribution
center automation, information systems and computer service offerings.
S-17
Interest Expense. Interest expense for 1996 increased by $5.8 million
to $20.4 million. Interest expense increased due to higher average daily
borrowings. Average daily borrowings for 1996 were $114.4 million more than the
average borrowings during 1995. The average daily borrowing interest rate
decreased approximately 0.8 percentage points from 1995. The increase in the
average daily borrowings resulted from the Company's decision in the first
quarter of 1996 to take advantage of early pay discounts offered by some of the
Company's major vendors as well as an increase in accounts receivable and
inventory. The increase in accounts receivable is a result of an increase in
sales. The decrease in the average daily borrowing interest rate resulted from
the Company selling $100 million of accounts receivable in June 1995 and the
issuance of $55.25 million of 6% convertible subordinated debentures in June
1996 (see "Liquidity and Capital Resources").
Net Earnings. Net earnings for 1996 increased 60% to $18.7 million,
which includes non-recurring charges of $991,000, compared with net earnings of
$11.7 million for 1995. Net earnings per share increased to $1.64 per fully
diluted share, which includes non-recurring charges of $0.09 per share, from the
$1.14 per fully diluted share reported for 1995.
Business Combination and Non-Recurring Charges. In December 1996, the
Company effected two business combinations accounted for as poolings of interest
transactions. The overall impact of the combinations with relation to the
financial statements taken as a whole are not material and thus prior periods
for the Company have not been restated to reflect the business combinations. The
Company recognized non-recurring charges of $991,000 related to the business
combinations during the fourth quarter of 1996. The effect of the immaterial
poolings was to increase stockholders' equity by approximately $643,000.
1995 Compared To 1994
Revenues. Computer product sales increased $366.8 million or 21.8% to
$2.0 billion during 1995. Computer services increased $10.1 million or 11.8% to
$95.5 million during 1995. Communications products and services revenue
increased $22.9 million or 66% to $57.7 million during 1995.
Revenues from computer product sales increased as a result of broad
based growth within both the independent reseller channel and the Company-owned
business centers. 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 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" pursuant to which certain manufacturers, beginning in 1994,
lessened or eliminated requirements from independent resellers to purchase
product from one source. Revenues from the Company-owned business centers
increased as a result of broad-based growth across all regional locations.
Computer services revenue increased as a result of the increase in computer
product sales. Revenues from communication products and services increased as a
result of broad-based growth within the Company's communications division.
Gross Margins. Computer product margins increased $8.6 million or 7.6%
to $122.4 million during 1995 and the gross margin percentage, exclusive of
non-recurring charges recognized in the second quarter of 1994, decreased 0.8
percentage points to 6.0% in 1995. Computer services margins increased $15.1
million or 28.7% to $67.6 million during 1995 and the gross margin percentage,
exclusive of non-recurring charges recognized in the second quarter of 1994,
increased 9.3 percentage points to 70.8% in 1995. Communications product and
services margins increased $6.3 million or 83.9% to $13.8 million during 1995
and the gross margin percentage increased 2.4 percentage points to 24.0% in
1995. Computer products margin was 60.1% of total 1995 gross margin versus 65.5%
of total 1994 gross margin. Computer services gross margin was 33.2% of total
1995 gross margin versus 30.2% of total 1994 gross margin. Communications
products and services gross margin was 6.7% of total 1995 gross margin versus
4.3% of total 1994 gross margin.
The increase in gross margin dollars for computer products was a result
of the increase in revenues. The decline in gross margin percentage for computer
products was a result of market pricing pressures related to open sourcing,
which began in the independent reseller channel during the second quarter of
1994, and an overall decline
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in hardware margins realized on end user sales. The increase in gross margin
dollars and gross margin percentage for computer services resulted from the
increased revenues and an increase in mix of services revenues to include more
higher margin systems integration services versus the support and technology
procurement services. The increase in gross margin dollars and gross margin
percentage for the communication products and services was a result of the
increased revenues and the increase in the mix of revenues to include more
higher margin long distance and services.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased $8.9 million or 5.6% to $169.3 million
in 1995. As a percentage of revenue, these expenses decreased 1.2 percentage
points from 8.9% in 1994 to 7.7% in 1995. Excluding the impact of 1994
non-recurring charges, SG&A expenses increased $10.9 million or 6.9% during
1995. SG&A as a percentage of revenue, excluding the impact of non-recurring
charges recognized in the second quarter of 1994, decreased 1.1 percentage
points during 1995.
The increase in SG&A during 1995 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 was
primarily a result of employee 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 1995. The
decrease in SG&A as a percentage of revenue during 1995 resulted from
operational efficiencies achieved through investments in distribution center
automation and information systems.
Interest Expense. Net interest expense for 1995 increased by $2.6
million to $14.6 million. The increase was due primarily to the increase in the
average daily borrowing interest rate. The Company's average daily borrowing
interest rate for 1995 increased approximately 1.3 percentage points during the
year while the average daily borrowings decreased to $178.8 million in 1995 from
$201.9 million in 1994.
Net Earnings. For the reasons described above, the net earnings for
1995 were $11.7 million compared to a net loss of $2.3 million in 1994 which
includes non-recurring charges of $4.2 million; an increase of $14.0 million.
Earnings per share for 1995 were $1.14 compared to a loss per share of $0.22 in
1994 which includes non-recurring charges of $.41 per share.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per share" which revises the calculation and
presentation provisions of Accounting Principals Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 28, 1997. Retroactive application will be required. The Company
believes the adoption of Statement 128 will not have a significant effect on its
reported earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are provided through an
inventory and working capital financing agreement of $550.0 million (increased
from $350.0 million as of June 27, 1997), convertible subordinated debentures of
$55.25 million, and a revolving credit facility of $40.0 million.
The $550 million facility provided by IBM Credit Corp. can be used by
the Company at its discretion, subject to a borrowing base, for its working
capital needs and inventory purchases. The inventory and working capital
financing agreement was amended in 1997 and expires June 29, 1998. On June 28,
1997, $338.8 million was outstanding under the inventory and working capital
financing agreement. Of this amount, $258.8 million was related to non-interest
bearing trade accounts payable. The balance of $80.0 million was related to
working capital with an interest rate of 7.5% based on three-month LIBOR. This
inventory and working capital financing agreement is secured by inventory and
other assets.
The $55.25 million 6% convertible subordinated debentures were issued
in June 1996 and are due June 15, 2006. The debentures are convertible into
common stock of the Company at a conversion price of $24.00 per share, subject
to adjustments under certain circumstances, beginning on September 19, 1996. The
debentures are not redeemable by the Company prior to June 16, 2000 and,
thereafter, the Company may redeem the debentures at various premiums to
principal amount. The debentures may also be redeemed at the option of the
holder at any time prior to June 16, 2000 if there is a Change in Control (as
defined in the indenture) at a price equal to 100% of the principal amount plus
accrued interest at the date of redemption.
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The $40.0 million revolving credit facility agreement expires in
February 1998. On June 28, 1997, $40.0 million was outstanding under the
revolving credit facility and the interest rate was 6.99% based on three-month
LIBOR. The revolving credit facility is secured by inventory and other assets.
The debt agreements contain certain restrictive covenants, including
the maintenance of minimum levels of working capital, tangible net worth,
limitations on incurring additional indebtedness and restrictions on the amount
of net loss the Company can incur. Certain covenants effectively limit the
amount of dividends which the Company may pay to the stockholders. The amount of
retained earnings on June 28, 1997 not restricted as to payments of cash
dividends under the most restrictive covenants in such agreements was
approximately $78.8 million. The Company was in compliance with the covenants
contained in the agreements on June 28, 1997.
Long-term debt was 21.1% of the total long-term debt and equity at June
28, 1997 versus 30.3% at June 29, 1996. The decrease was primarily a result of
the payment of $13.6 million of private placement notes previously held by
unaffiliated insurance companies and an increase in equity due to earnings and
the issuance of additional shares of common stock.
The Company has entered into an agreement to sell $200 million of
accounts receivable, with limited recourse, to an unrelated financial
institution. The agreement was initially entered into in June 1995 with respect
to $100 million of accounts receivable and was amended in January 1997 to sell
an additional $100 million of accounts receivable. New qualifying receivables
are sold to the financial institution as collections reduce previously sold
receivables in order to maintain a balance of $200 million sold receivables. On
June 28, 1997, $46.6 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. On June 28, 1997, the interest rate was 6.09%.
The Company occasionally uses financial instruments to reduce interest
rate risk. The Company does not hold or issue financial instruments for trading
purposes. On January 17, 1997 the Company entered into a one-year interest rate
swap agreement with an unrelated financial institution which resulted in certain
floating rate interest payment obligations becoming fixed rate interest payment
obligations at 5.82%. The notional amount of the swap agreement was $100
million.
During the first six months of 1997, the Company used $44.0 million of
cash in operations. Inventory increased by $74.1 million during the first six
months with a portion of the increase offset by an increase in accounts payable
of $68.8 million. Accounts receivable also increased $55.2 million during the
first six months of 1997. Inventory increased during the first six months of
1997 as a result of the Company taking advantage of certain major manufacturers
inventory incentive programs. Accounts payable increased as a result of the
increase in inventory levels. Accounts receivable increased during the first six
months primarily as a result of the increase in revenues for the first six
months of 1997.
The Company used $35.9 million in cash for investing activities in the
first six months of 1997. Cash of $19.8 million was used to purchase fixtures
and equipment and cash of $4.1 million was used for business combinations.
Net cash provided from financing activities for the first six months of
1997 totaled $79.2 million, of which $100.0 million was provided from the sale
of accounts receivable. The financing proceeds were used to reduce short term
borrowings of $20.8 million.
Operating activities used cash of $18.3 million in 1996 compared to
$57.7 million in 1995. The primary factor contributing to the change in cash
used by operating activities was the net cash provided by inventory and accounts
payable. In 1996, inventory increased $31.8 million over 1995 with an offsetting
increase in accounts payable of $71.1 million resulting in net cash provided
from inventory and accounts payable of $39.3 million. In 1995, inventory
increased $124.3 million over 1994 with a portion of the increase financed
through an increase in accounts payable of $105.1 million resulting in net cash
used in inventory and accounts payable of $19.2 million.
S-20
The increase in cash provided by inventory and accounts payable was primarily a
result of an increase in inventory turns in addition to the Company's efforts to
match accounts payable terms more closely with inventory turns.
The net cash provided by inventory and accounts payable was primarily
offset by an increase in accounts receivable in 1996. Accounts receivable levels
increased $123.6 million due to the increased revenues.
The Company used $61.1 million in cash for investing activities in
1996. Cash of $26.2 million was used to purchase fixtures and equipment and cash
of $23.4 million was used for business combinations (See Notes to Consolidated
Financial Statements -- Business Combinations).
Net cash provided by financing for 1996 totaled $90.1 million, of which
$63.0 million was provided from notes payable and $55.25 million was provided
from the proceeds received from the sale of 6% convertible subordinated
debentures. The financing proceeds were partially offset by $30.3 million in
payments on long-term borrowings.
The Company believes the funding expected to be generated from
operations and provided by the existing credit facilities and this offering will
be sufficient to meet working capital and capital investment needs for the next
twelve months.
S-21
BUSINESS
Inacom is a leading single source provider of information technology
products and technology management services designed to enhance the productivity
of information systems primarily for Fortune 1000 clients. The Company offers a
comprehensive range of value added services to manage the entire information
system life cycle including: (1) needs assessment and technology planning, (2)
technology procurement and configuration, (3) systems integration and systems
management, (4) ongoing systems support and distributed support, and (5) asset
management. Inacom's expertise includes the integration of voice and data
communications. Inacom sells its products and services through a marketing
network of 51 Company-owned business centers throughout the United States that
focus on serving large corporations. The Company also has a network of
approximately 1,000 value added resellers that typically have a regional,
industry, or specific product focus. The Company has international affiliations
in Europe, Asia, Central and South America, the Caribbean, Middle East, Africa,
Canada and Mexico to satisfy the technology management needs of its
multinational clients. Inacom is the largest purchaser of IBM computer products
and believes it is the second largest purchaser of Compaq computer products
worldwide.
Inacom's expertise in procurement, configuration and delivery of PC's,
peripherals and software from a wide range of major vendors enables the Company
to customize information systems to meet specific client needs. In addition,
Inacom provides its clients with numerous benefits including in-depth product
knowledge and experience, competitive pricing from its purchasing arrangements
and a wide array of services supporting client needs on an on-going basis.
Management believes that the Company's expertise in procuring,
configuring and delivering information technology products and providing
technology management services provides a strategic advantage in addressing
certain industry trends. In particular, businesses increasingly are seeking to
outsource the management and support of their information technology systems
with fewer providers. At the same time, the demand for cost-effective,
customized technology systems has led a number of manufacturers, including IBM,
Compaq and Hewlett-Packard, to move from "build-to-forecast" delivery systems to
"build-to-order" programs in which they ship computer components to a limited
number of qualified technology providers, including Inacom, for final assembly
and configuration. Management also believes that these trends will lead to
further consolidation in the highly fragmented technology management services
industry. As a result of the Company's experience in integrating acquired
businesses, management believes that the Company is well-positioned to take
advantage of strategic acquisition opportunities as they arise.
Inacom's earnings growth has been enhanced by its rapidly expanding
services business. In the first six months of fiscal 1997, computer services
provided 47.7% of net earnings, more than double the net earnings from the same
period in 1996. Computer products contributed 40.8% and communications products
and services provided 11.5% of net earnings in the same period. Inacom expects
that earnings from services will continue to grow more rapidly than earnings
from its other business segments given Inacom's broad offering of services to
its clients and the industry trends discussed above.
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals, Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are: (i) to leverage client
relationships to continue expanding higher-margin services revenues, (ii) to
capitalize on the trend toward build-to-order/configure-to-order systems, (iii)
to expand offerings and geographic coverage through strategic acquisitions, and
(iv) to capitalize on the convergence of data and voice communications.
Industry Background
The markets for corporate information technology products and
technology management services are expected to grow at an annual rate of 18% and
15%, respectively, and are projected to reach $44.9 billion and $26.1 billion,
respectively, in 2000 according to DataQuest, a Gartner Group company, a leading
information technology research firm. In recent years, the computer industry has
undergone a significant transformation as
S-22
personal computers have replaced traditional minicomputer and mainframe systems.
The increasing use of personal computers has led to the networking of personal
computers into local area networks (LANs), which in turn has resulted in the
expansion of shared information through wide area networks (WANs). Networks are
typically comprised of servers, personal computers, peripherals, communication
devices and software. Networks increase the speed and flexibility of
distributing information and the usefulness of such information to end-users.
Achieving the optimal technology system, however, is difficult for many
businesses due to the complexity of the distributed network environment, the
fragmented sources of products and services and the lack of trained personnel to
design, deploy and support networks.
The decision-making process that businesses face when designing,
selecting and deploying information technology solutions is becoming more costly
and complex. Many businesses increasingly seek to outsource part or all of the
management and support of their information technology systems. Businesses must
select from an expanding number of product options with shortening life cycles.
Businesses seeking to implement enterprise-wide information management solutions
often must integrate diverse and incompatible hardware and software environments
which have independently evolved within their organizations. Such integration
typically requires the design of a new network, the upgrade of existing hardware
and software, and the migration to new systems. In addition, a shortage of
qualified information technology personnel has limited the ability of many
businesses to capitalize on the latest technologies. Many businesses find it
increasingly difficult and costly to maintain the internal infrastructure needed
to support their networks. As a result of these trends, the outsourcing of
computer network management has grown substantially.
These developments have created a rapidly-growing market for managing
distributed technology. Although competition has led to reduced margins in the
computer products segment of the industry, the complexity of designing,
selecting and deploying information systems has led to an increase in demand for
related higher margins technology management services. The demand for
cost-effective customized technology systems has driven a significant change in
industry delivery methods. The historical method was a "build-to-forecast"
system, in which both manufacturers and providers of computer products
maintained inventories based on forecasted client demand. Recently, a number of
manufacturers, including IBM, Compaq and Hewlett-Packard, have announced
"build-to-order" programs in which they will ship basic computer components to a
limited number of technology providers, including Inacom, based on specific
client orders, with final assembly and configuration to be performed by the
technology providers for delivery to the business client.
Business Strategy
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are as follows.
Leverage Client Relationships to Continue Expanding Higher-Margin
Services Revenues. Inacom's large client base of hardware procurement clients is
a substantial source of services revenue. As businesses increasingly seek to
outsource systems management functions to fewer providers, the Company believes
it can continue to rapidly grow its services revenue. During the first six
months of 1997, computer services accounted for approximately 48% of net
earnings, compared to 38% in the comparable period one year ago. Services
revenue is generally higher margin, and tends to be more predictable and
recurring than hardware procurement revenue making it a particularly attractive
portion of the business mix. Inacom believes that its demonstrated ability to
extend its relationships into the full life cycle of management services
provides it with a competitive advantage in the technology management services
industry. The Company also believes that the growing outsourcing of computer
technology management services along with the Company's focus on faster growing
higher-margin services will allow it to grow its services revenues in excess of
projected industry growth rate.
Capitalize on Trend Toward Build-To-Order/Configured-To-Order Systems.
Businesses are demanding more efficient, cost-effective procurement and delivery
of custom-configured systems. In response to this demand for build-to-order
services, Inacom has invested $42 million to automate its three assembly and
configuration
S-23
facilities. The Company believes that these facilities are among the most
sophisticated in the industry due to their state-of-the-art infrastructure and
information systems. Two of the Company's assembly and configuration facilities
have complete build-to-order capabilities and the third assembly and
configuration facility will have such capabilities by the end of 1997. Inacom's
strategy is to configure network-ready systems for its business clients on
behalf of vendors such as IBM, Compaq and Hewlett-Packard. Inacom has been
designated as a build-to-order channel participant for each of these three major
vendors.
Expand Service Offerings and Geographic Coverage Through Strategic
Acquisitions. Inacom continually seeks to acquire businesses which enhance its
service capabilities and allow the Company to build geographic coverage in
attractive markets. Inacom has demonstrated its ability to successfully
integrate acquired businesses, having acquired eight businesses during the past
eighteen months. These acquisitions expanded Inacom's offerings in the areas of
procurement, delivery, network integration, network consulting, asset management
and asset registry. These acquisitions also enhanced Inacom's geographic
coverage in key metropolitan markets across the United States. Management
believes that industry trends, including build-to-order, will result in further
consolidation in the highly fragmented technology management services industry.
Inacom's strategy is to use its experience in integrating acquired businesses to
take advantage of strategic acquisition opportunities as they arise.
Capitalize on Convergence of Data and Voice Communications. The Company
also is focusing on opportunities resulting from the convergence of voice and
data communications with computer information management systems. Inacom is
leveraging its expertise in providing computer services to assist its business
clients in integrating communications systems to allow voice/data recognition,
remote access, video conferencing, mobile communications and internet access.
Currently, Inacom provides its clients with the communications services and
products of Lucent Technologies, AT&T, Cisco Systems, 3Com and Intel. The
Company believes it is one of the nation's largest independent providers of
communications products for Lucent Technologies.
Life Cycle Management by the Company
As a single source provider of technology products and services, the
Company strives to help its clients optimize their information technology
investments and control ongoing costs throughout the life cycle of the clients'
technology systems. The Company combines a process improvement approach along
with tools and practices gained by experience and trained personnel to assist
its clients in managing the life cycle and costs of distributed technology.
Needs Assessment and Technology Planning. Technology planning services
involve assisting clients in designing and developing standardized technology
platforms. The services include determining standard hardware technology,
application software, operating system software and networking platforms. The
Company assists its clients with the selection and standardization of
manufacturer brands (such as IBM, Compaq, Hewlett-Packard, Microsoft, Lotus and
others) and assists its clients in studying the total cost, performance and
capabilities of these brands and products.
Technology planning services performed by the Company also include the
development of strategies for deployment of distributed technology systems
within its clients' businesses. The Company assists its clients in decisions to
lease or purchase, determining replacement cycles and centralizing acquisition
processes. To assist clients with technology planning, the Company has developed
specific products and programs such as Policy Based ManagementTM, Tactical
Enterprise Network AssessmentTM and Enterprise Technology BlueprintTM.
Technology Procurement and Configuration. Technology procurement and
configuration services generally involve coordinating the technology purchase
process, requisitioning technology products, processing, tracking and reporting
on the status of orders, customizing hardware and software configurations,
direct shipment and shipment tracking. The demand for cost-effective customized
technology systems has driven a significant change in industry procurement
methods including the trend toward build-to-order programs. Inacom believes that
only a limited number of technology providers will have the scale and
configuration capabilities necessary to meet these manufacturer requirements.
Compaq, IBM and Hewlett-Packard have chosen Inacom for participation in their
S-24
build-to-order programs. Inacom has invested $42 million in its state-of-the-art
assembly and delivery systems to provide build-to-order capabilities. The
facilities are strategically located in Swedesboro, New Jersey, Omaha, Nebraska,
and Ontario, California to provide prompt and cost-effective delivery
nationwide.
The Company also focuses its technology procurement services on
shortening the delivery time of technology products, improving compliance to
standards in its clients' organizations, assisting in negotiating hardware and
software agreements on behalf of its clients, and providing other services that
minimize its clients' costs. The Company provides certain clients with on-site
technical procurement specialists who assist and manage the technology
procurement process at client locations nationwide. These procurement
specialists are technically oriented and focus on process improvement and
operational efficiencies in the procurement process.
The Company believes it has a competitive advantage in providing
procurement services through the use of its automated state-of-the-art ordering
systems. The Company's Inacommerce and Inacommerce PlusTM software provide an
easy to use internet-based procurement management system that allows a business
client to determine real-time product availability and order status along with a
custom configurator to assist the client in designing a technology solution from
its desktop computer. The Company's VISIONTM 2000 software also allows a
business client to determine daily product availability, custom configure and
order its technology solution. The Company's Direct Express delivery program
reduces the number of steps in the procurement process by shipping products
directly to the location selected by the business client.
Systems Integration and Systems Management. The Company provides
systems integration services to its clients in an effort to assist clients in
controlling costs and gaining control of the life cycle of its distributed
technology systems. The Company has products and services available to assist,
design and support clients' WANs and LANs and to manage software procurement and
license control. In addition, the Company can provide solutions to its clients
for data storage management, technology security management, capacity planning,
data and database management, and internet and intranet connectivity, support
and management.
The Company provides systems management services that assess the
current state and future needs of a client's distributed technology network to
maximize the value of the client's investment in its networked systems. The
systems management services provided through remote management centers assist
clients in the control and reliability of LAN/WAN environments, provide a study
of adequate network speed and responsive user services and monitor the
infrastructure and system capabilities to satisfy clients' current and future
needs.
The Company employs high-end technical systems engineers and systems
consultants who perform systems integration services at client locations. These
systems engineers and systems consultants, and the project managers who
coordinate their activities, are contracted to the client for hourly rates or
for fixed-price extended contracts.
The Company has developed specific products and programs to assist its
clients in the systems management function, including Inacom Network PatrolTM
and Inacom Network Baseline.TM
Ongoing Systems Support and Distributed Support. The Company provides
its clients ongoing support in their distributed technology systems primarily in
two major areas: "break/fix" hardware maintenance and installation, moves,
addition and changes ("IMACs"). These functions are similar, but differ in the
timing and level of service.
The Company's break/fix hardware maintenance capabilities are supported
directly by the Company's help desk operation, HelpCentralTM. Centralized
break/fix hardware maintenance provides coordination, problem solving, tracking
and control of the clients' hardware maintenance needs. The Company's national
services network, comprised of over 1,500 Company technicians plus over 2,000
technicians in affiliated partner locations provides extensive coverage of
clients' distributed technology.
Similarly, the Company delivers IMAC services to its clients with the
same technician delivery infrastructure. These distributed support services are
managed through various scheduling and reporting tools that
S-25
are interrelated with the Company's VISTATM, VISIONTM, Inacommerce,TM and
Inacommerce PlusTM information systems. Additionally, the Company provides
distributed support services to its clients by providing on-site technical
personnel that may be involved in various support activities, including LAN
administration, network monitoring, general deskside support and some end-user
training.
The Company also offers convergence solutions centered around wide area
data networks, computer and telephone integration, desktop video conferencing,
and wireless data communications. These services include specialized support
programs, maintenance programs and specialized software. The Company provides
communication network services with advanced digital capabilities enabling
voice, data and video communications, utilizing AT&T, Frontier and Westinghouse
networks. The Company's communication services also include long distance,
inbound 800 service, calling cards and teleconferencing featuring account codes
and enhanced billing and customized call reports which allow business clients to
restrict and track telecommunications activity.
Asset Management. Asset management services are becoming increasingly
important as businesses determine what capabilities their existing technology
products have and whether, when and how to upgrade to the latest technology.
Asset management services consist of asset registration, tracking and disposal
of technology assets as they move throughout the client's organization.
The Company has developed a comprehensive program called Inacom Asset
AdvantageTM that contains tools and process improvement techniques to assist its
clients' inventory, track and control distributed technology assets. This
program helps clients meet financial, risk management, custodial, warranty,
maintenance, service and refreshment objectives. The products, including Inacom
Asset Roll-Call,TM can be integrated with HelpCentralTM and also integrated with
the other life cycle products and programs to help lower the total ownership
cost of clients' technology. Additionally, the Company's Computer Resources
International group and Boston Computer Exchange subsidiary provide customized
asset registry, asset tracking services and disposal services to its clients.
Marketing Network
Computer products and services are sold through a marketing network of
approximately 1,000 business centers located throughout the United States, of
which 51 are Company-owned. Communications products and services are provided
through a network of 18 direct sales offices and contractual relationships with
approximately 160 dealers. The Company has international affiliations in Europe,
Asia, Central and South America, the Caribbean, Middle East, Africa, Canada and
Mexico to satisfy the technology management needs of its multinational clients.
The Company's direct sales force in the Company-owned business centers
enables the Company to establish relationships with major corporate clients for
purposes of marketing the Company's technology management services.
Products and Vendors
Computer products include microcomputers, workstations, servers,
monitors, printers and operating systems software. The Company currently
distributes computer products from leading vendors such as Compaq, IBM,
Hewlett-Packard, Toshiba, Lexmark, Novell, Microsoft, Oracle, 3Com, SynOptics,
Cisco, Intel and Network General. Compaq, IBM and Hewlett-Packard represented
greater than 65% and 63% of the Company's net revenues in fiscal 1996 and for
the first six months of 1997, respectively. The Company is the largest purchaser
of IBM computer products and believes it is the second largest purchaser of
Compaq computer products on a world wide basis.
Communications products and services include phone systems, voice mail,
voice processing, data network equipment, multiple small office-home office
offerings and maintenance. The Company also offers network services including
long distance, 800 service, calling cards, wide area value-added data
networking, video conferencing and cellular communications. The products of
Lucent Technologies and the services of AT&T constitute approximately
S-26
90% of the voice and data systems sold by the Company. The Company believes it
is one of the nation's largest independent provider of Lucent Technology
business products.
The Company has negotiated purchase arrangements, including price,
delivery, training and support, directly with most major vendors. The Company's
extensive vendor relationships allow it to offer over 35,000 products in
providing multiple-vendor solutions to meet its business client's needs. The
Company's agreements with its vendors are generally on a non-exclusive basis and
may be terminated by the vendors on notice typically ranging from 30 to 90 days.
The agreements with vendors generally contain provisions with respect
to product cost, price protection, returns and product allocations; the Company
is entitled to price protection with all major vendors on eligible products in
the Company's inventory in the event of vendor price reductions. Certain vendors
also sponsor payment programs with several financial service organizations to
facilitate product sales through the business centers. In addition, the
Company's primary vendors provide various incentives for promoting and marketing
their products which typically range from 1% to 5% of purchases. The three major
forms of vendor incentives received by the Company are co-operative funds,
market development funds and vendor rebates. Co-operative funds are earned based
upon the sale of the vendor's products and generally must be utilized to offset
the costs associated with advertising and promotion pursuant to programs
established by the respective vendor. Market development funds are earned based
upon the Company's purchases from the vendor and generally must be used for
market development activities approved by the respective vendor. Vendor rebates
are based upon the Company's attaining purchase volume targets established with
the vendor. Rebates generally can be used at the Company's discretion.
International Capabilities
InaCom International, a subsidiary of the Company, has international
affiliations in Europe, Asia, Central and South America, the Caribbean, Middle
East, Africa, Canada and Mexico to satisfy the technology management needs of
its multinational clients. ICG, an affiliation of leading independent
organizations in various countries, provides pc-related products and services to
international corporate clients. Inacom's capabilities in international project
management and local resources of the affiliated members allow Inacom to serve
the global needs of its multinational clients' information technology projects.
Inacom Latin America, a 60% owned subsidiary of the Company, provides
international logistics and configuration services in Mexico, the Caribbean,
Central and South America.
Clients
The Company is not dependent for a material part of its business upon a
single or a few clients and the loss of any one client would not have a material
adverse effect on the Company's business.
Employees
At June 28, 1997 the number of employees was 4,309, including 1,813
systems engineers, technicians and service support employees. In addition, at
June 28, 1997 the Company had contracted for the services of approximately 600
systems engineers and consultants, and through an alliance with selected
independent resellers has access to the services of approximately 2,000
additional services personnel. None of the employees is covered by a collective
bargaining agreement. The Company considers its relations with employees to be
good.
Competition
All aspects of the technology management services industry are highly
competitive. The technology management industry continues to experience a
significant amount of consolidation. In the future Inacom may face fewer but
larger and better financed competitors as a consequence of such consolidation.
The Company's marketing network competes for potential clients, including
national accounts, with numerous resellers and distributors. Several computer
manufacturers have expanded their channels of distribution, pricing and product
positioning and
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compete with the Company's marketing network for potential clients. Other
competitors operate mail-order or discount stores offering clones of major
vendor products. The Company also competes with other computer technology
providers in the recruitment and retention of franchisees and
independently-owned resellers. The Company competes in the computer services
industry with a large number of service providers, including IBM through its
Global Services division, Andersen Consulting, CompuCom, EDS, ENTEX, GE Capital
Technology Management Service, IKON Offices Solutions and Vanstar. Competition
in communication products and services is also intense, and includes entities
which are also significant vendors of the Company, such as Lucent Technologies
and AT&T. Certain competitors and manufacturers are substantially larger than
the Company and have greater financial, technical, service and marketing
resources. The Company's marketing network competes primarily on the basis of
professionalism and client contact, quality of product line, availability of
products, service, after-sale support, price, and quality of end-user training.
Service Mark and Trademark
The Company holds United States service mark and trademark
registrations for the marks "Inacom", "ValCom" and "Inacomp." The Company also
has certain state registrations. The Company claims common law rights to the
marks based on adoption and use. To the Company's knowledge, there are no
pending interference, opposition or cancellation proceedings, or litigation
threatened or claimed, with respect to the marks in any jurisdiction.
Government Regulation
The Company is subject to various federal, state and local laws and
regulations affecting businesses generally such as laws and regulations
concerning employment, workplace safety and protection of the environment. The
Company is also subject to federal and state laws regulating franchise
relationships which generally impose registration and/or disclosure requirements
on the Company in the offer and sale of franchises and also regulate related
advertisements. The Company believes it is in substantial compliance with all
such laws and regulations.
S-28
MANAGEMENT
The Company's executive officers and directors are listed below,
together with their ages and offices held by them. The Company's Board of
Directors consists of nine members elected annually.
Name Age Position
Bill L. Fairfield 50 Director, President and Chief Executive Officer
David C. Guenthner 47 Executive Vice President and Chief Financial Officer
Michael A. Steffan 45 President, Distribution and Operations, and Secretary
Cris Freiwald 42 President and General Manager, International Division
Robert A. Schultz 54 Group Executive, Information Systems Group
Larry Fazzini 50 Vice President of Corporate Resources
George DeSola 50 Group Executive, Technology Service Group and
President, Inacom Communications
Jeffrey A. Hartigan 54 Vice President and Chief Information Officer
Steven Ross 39 President, Reseller Division and Corporate Marketing
Leon Kerkman 38 Vice President, Corporate Controller
Paul Kellenberger 37 Vice President of Planning and Business Development
Joseph Auerbach 80 Director
Mogens C. Bay 48 Director
James Q. Crowe 48 Director
W. Grant Gregory 56 Director
Rick Inatome 43 Director
Joseph Inatome 71 Director
Gary Schwendiman 56 Director
Linda S. Wilson 60 Director
Bill L. Fairfield has been President, Chief Operating Officer and a
director of the Company since March 1985. He was named Chief Executive Officer
in September 1987.
David C. Guenthner was named Executive Vice President and Chief
Financial Officer in November 1991. Prior to November 1991, Mr. Guenthner was
Senior Vice President of Finance and Chief Financial Officer for the Company.
Michael A. Steffan was named President of Distribution and Operations
in December 1995. Mr. Steffan was responsible for the Reseller Division from
December 1994 to December 1995 in addition to his position as President of
Distribution and Operations, a position he had held since May 1993. Prior to May
1993, Mr. Steffan was Vice President of Corporate Development and Secretary for
the Company.
Cris Freiwald was named President of the International Division in
November 1994. Mr. Freiwald was Vice President of Corporate Development from May
1993 to November 1994. Prior to May 1993, Mr. Freiwald was Director of Business
Development.
Robert A. Schultz was named Group Executive of the Information Systems
Group in December 1996. Prior to December 1996, Mr. Schultz was the President
and General Manager of Direct Operations, a position he has held since April
1994, and the President and General Manager of Client Services Division, a
position he had held from January 1993 to December 1996. Mr. Schultz was
responsible for Direct Operations and the Advanced Systems and Services Group
for the Company from August 1991 to January 1993.
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Larry Fazzini was named Vice President of Corporate Resources in
February 1993 when he joined the Company. Prior to February 1993, Mr. Fazzini
was the Director of Human Resources for Sears Business Centers, Inc., a
distributor of information technology products and services.
George DeSola was named Group Executive of the Technology Services
Group in December 1996 in addition to his position as President of Inacom
Communications, a position he has held since he joined the Company in March
1994. Mr. DeSola was responsible for Corporate Marketing from December 1994 to
December 1996 in addition to his position as President of Inacom Communications.
Prior to March 1994, Mr. DeSola was the Vice President of Marketing and Customer
Service for MCI Communications Corp., a telecommunications company.
Jeffrey A. Hartigan was named Vice President and Chief Information
Officer in May 1995 when he joined the Company. Prior to May 1995, Mr. Hartigan
was Vice President of Information Services at Northern Telecommunications Inc.
(NORTEL), a telecommunications company.
Steven Ross was named President of the Reseller Division and Corporate
Marketing in December 1996. Prior to December 1996, Mr. Ross was the President
of the Reseller Division, a position he has held since he joined the Company in
December 1995. Mr. Ross was Vice President of Sales and Business Development at
Intelligent Electronics Inc., a distributor of information technology products,
from September 1993 to November 1995. Prior to September 1993, Mr. Ross was the
Executive Vice President of Ultimate/Allerion Corp., an international systems
integrator company.
Leon Kerkman was named Vice President and Corporate Controller in June
1993. Prior to June 1993, Mr. Kerkman was Corporate Controller, a position he
has held since he joined the Company in 1989.
Paul Kellenberger was named Vice President of Business Development in
March 1997 when he joined the Company. Mr. Kellenberger was the Vice President
of Worldwide Channels, Computer Group from January 1995 to February 1997 and the
General Manager, Canada from February 1994 to December 1994 at Motorola Inc.
Prior to February 1994, Mr. Kellenberger was the Director of Marketing, Canada
for Digital Equipment Company, an information technology products company.
Joseph Auerbach is Professor of Business Administration, Emeritus, at
the Harvard Business School. He is Counsel to the firm of Sullivan & Worcester,
Boston, Massachusetts.
Mogens C. Bay is the President and Chief Executive Officer of Valmont
Industries, Inc. He is a director of ConAgra, Inc.
James Q. Crowe is the President and Chief Executive Office of Kiewit
Diversified Group, Inc. He is a director of Peter Kiewit Sons' Inc., CalEnergy,
Inc. and C-TEC Corporation.
W. Grant Gregory is Chairman of Gregory & Hoenemeyer, Inc., New York
and serves as a director of Bozell Inc., Ambac, Inc., Ambac Indemnity Group and
HCIA Health Care Inc.
Rick Inatome is Chairman of the Board of Directors and in 1976 was the
co-founder of Inacomp Computer Centers, Inc. and its Chief Executive Officer
from 1979 to August 1991. He is a director of Atlantic Premium Brands, American
Speedy Print, Liberty BIDCO, Action Technologies, Inc. and Saturn Electronic and
Engineering, Inc.
Joseph Inatome is a co-founder of Inacomp Computer Centers, Inc., and
was an executive officer until July 1989, and director until August 1991. He is
currently a director of American Speedy Print.
Gary Schwendiman is Professor of International Studies in the College
of Business at the University of Nebraska-Lincoln and was Dean of the College of
Business Administration for the University of Nebraska-Lincoln
S-30
from 1977 to 1994. Mr. Schwendiman serves as a director of The Gallup
Organization, Inc. and Security Mutual Life Insurance Co.
Linda S. Wilson is the President of Radcliffe College. She is a
director of Citizens Financial Group and Trustee of Massachusetts General
Hospital Corporation.
S-31
DESCRIPTION OF DEBENTURES
The following description of the particular terms of the Debentures
offered hereby (referred to in the Prospectus as the "Debt Securities")
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Debt Securities set forth in the
Prospectus, to which description reference is hereby made. See "Events of
Default", "Modification of Indentures", "Consolidation, Merger and Sale of
Assets", "Other Covenants" and "Discharge and Defeasance" in the Prospectus. The
following summary of the Debentures is qualified in its entirety by reference to
the Subordinated Indenture referred to in the Prospectus and to the First
Supplemental Indenture thereto.
General
The Debentures will be unsecured general obligations of the Company,
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Debentures," and convertible into Common Stock
as described under "Conversion." The Debentures will mature on ____________,
2004. The Debentures will be limited to $50,000,000 aggregate principal amount
($57,500,000 if the over-allotment option is exercised in full). The Company
will pay interest on the Debentures semi-annually on _______, and ________, of
each year, commencing _______, 1998 at the rate of ____% per annum and will pay
interest on the Debentures (except default interest) to the persons who are
registered holders of Debentures at the close of business on the preceding
_____________ and _______________, respectively. The Company may pay principal
and interest by check and may mail an interest check to a holder's registered
address. Holders must surrender Debentures to the Paying Agent to collect
principal payments.
The Debentures are represented by a global Debenture in definitive,
fully registered form, deposited with The Depository Trust Company ("DTC").
Beneficial interests in the global Debentures will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
participants.
The Debentures are issued without coupons in denominations of $1,000
and whole multiples of $1,000. A holder may transfer or exchange Debentures in
accordance with the Subordinated Indenture. No service charge will be made for
any registration of transfer, exchange or conversion of Debentures, except for
any tax or other governmental charges that may be imposed in connection with any
transfers, registration of transfers or exchanges. The registrar for the
Debentures need not transfer or exchange any Debentures selected for redemption.
Also, it need not transfer or exchange any Debentures for a period of 15 days
before selecting Debentures to be redeemed. The registered holder of a Debenture
may be treated as its owner for all purposes.
The Trustee currently acts as Registrar, Paying Agent and Conversion
Agent. The Company may appoint an additional, or change any, Paying Agent,
Registrar or Conversion Agent without notice. The Company may act in any such
capacity.
The Subordinated Indenture does not contain any restrictions on the
payment of dividends or on the repurchase of securities of the Company or any
financial covenants, nor does the Subordinated Indenture require the Company to
maintain any sinking fund or other reserves for repayment of the Debentures.
Conversion
The holders of the Debentures are entitled at any time before the close
of business on the date of maturity of the Debentures, subject to prior
redemption or repurchase, to convert the Debentures, or portions thereof (if the
portions are $1,000 or whole multiples thereof) into shares of Common Stock at
the conversion rate of _____ shares of Common Stock per $1,000 principal amount
of Debentures (equivalent to a conversion price of $___ per share), subject to
adjustments as described below. Except as described below, no payment or
adjustment will be made for accrued interest on a converted Debenture or for
dividends on any Common Stock issued on conversion. If any Debenture is
converted during the period beginning on (and including) a record date for the
payment of interest and ending on (and including) the opening of business on the
next succeeding interest payment date, unless such Debenture has been called for
redemption on a redemption date or which are repurchasable on
S-32
a repurchase date occurring, in either case, during such period, then such
Debenture must be accompanied by funds equal to the interest payable to the
registered holder on such interest payment date on the principal amount so
converted. A Debenture converted on an interest payment date need not be
accompanied by any payment, and the interest on the principal amount of the
Debenture being converted will be paid on such interest payment date to the
registered holder of such Debenture on the immediately preceding record date.
The Company will not issue fractional shares of Common Stock upon conversion of
Debentures and instead will deliver a check in lieu of the fractional share
based upon the market value of the Common Stock on the last trading day prior to
the conversion date. In the case of Debentures called for redemption, conversion
rights will expire on the redemption date unless the Company defaults in the
payment of the redemption price. In the event any holder exercises its
Repurchase Right (as defined below), such holder's conversion right will
terminate upon receipt of the written notice of exercise of such Repurchase
Right. See "Repurchase at Option of Holders Upon Change in Control."
The conversion price is subject to adjustment as set forth in the
Subordinated Indenture in certain events, including the payment of dividends or
distributions on the Common Stock in shares of capital stock; subdivisions or
combinations of the Common Stock into a greater or smaller number of shares; a
reclassification of the Common Stock resulting in an issuance of any shares of
the capital stock of the Company; the distribution of rights or warrants to all
holders of Common Stock entitling them to purchase Common Stock at less than the
then current market price at that time; and the distribution to all holders of
Common Stock of assets or debt securities or any rights or warrants to purchase
securities, other than Common Stock, of the Company (other than cash dividends
or cash distributions payable out of consolidated net income or retained
earnings). No adjustment will be required for rights to purchase Common Stock
pursuant to any plan of the Company for reinvestment of dividends or interest,
or for a change in the par value of the Common Stock. To the extent that
Debentures become convertible into cash, no adjustment will be required
thereafter as to cash. No adjustment in the conversion price will be made unless
such adjustment would require a change of at least 1% in the conversion price;
however, any adjustment that would otherwise be required to be made shall be
carried forward and taken into account at the earlier of any subsequent
adjustment or three years after the occurrence of the event giving rise to the
adjustment. The Company reserves the right to make such reductions in the
conversion price in addition to those required in the foregoing provisions as
the Company in its discretion shall determine to be advisable in order that
certain stock-related distributions hereafter made by the Company to its
stockholders shall not be taxable. Except as stated above, the conversion price
will not be adjusted for the issuance of Common Stock or any securities
convertible into or exchangeable for Common Stock, or carrying the right to
purchase any of the foregoing.
If the Company reclassifies the Common Stock or merges into, or
transfers or leases substantially all of its assets to, another corporation, the
holders of the Debentures then outstanding will be entitled thereafter to
convert such Debentures into the kind and amount of shares of capital stock,
other securities, cash or other assets which they would have owned immediately
after such event had such Debentures been converted immediately before the
effective date of the transaction.
Conversion price adjustments may in certain circumstances result in
constructive distributions that could be taxable as dividends under the Internal
Revenue Code of 1986, as amended, to holders of Debentures or to holders of
Common Stock issued upon conversion thereof.
Optional Redemption
The Debentures may be redeemed on at least 20 and not more than 60 days
notice at the option of the Company, in whole at any time or in part from time
to time, at the following redemption prices (expressed as percentages of
principal), together with accrued interest to the date fixed for redemption,
during the twelve month period beginning _________ in the years set forth below:
Year Percentage
S-33
and thereafter at 100% of the principal amount, plus accrued interest; provided,
that no redemption may be made prior to ___________. If less than all the
Debentures are to be redeemed, the Trustee will select the Debentures to be
redeemed on a pro rata basis, by lot or by any other method the Trustee, in its
discretion, deems fair.
Repurchase at Option of Holders Upon Change in Control
Upon any Change in Control (as defined below) with respect to the
Company, each holder of Debentures shall have the right (the "Repurchase
Right"), at the holder's option, to require the Company to repurchase all of
such holder's Debentures, or a portion thereof which is $1,000 or any integral
multiple thereof, on the date (the "Repurchase Date") that is 45 days after the
date of the Company Notice (as defined below) at a price equal to 100% of the
principal amount of the Debentures, plus accrued interest, if any, to the
Repurchase Date (the "Repurchase Price"). Inacom may, at its option, in lieu of
paying the Repurchase Price in cash, pay the Repurchase price in Common Stock
valued at 95% of the average of the closing prices of the Common Stock for the
five consecutive trading days ending on and including the third trading day
preceding the Repurchase Date.
Within 30 days after the occurrence of a Change in Control, the
Company is obligated to mail to all holders of record of the Debentures a notice
(the "Company Notice") of the occurrence of such Change in Control and the
Repurchase Right arising as a result thereof. The Company shall deliver a copy
of the Company Notice to the Trustee and shall cause a copy of such notice to be
published in The Wall Street Journal or another newspaper of national
circulation. To exercise the Repurchase Right, a holder of Debentures must
deliver on or before the 30th day after the date of the Company Notice
irrevocable written notice to the Company (or an agent designated by the Company
for such purpose) and the Trustee of the holder's exercise of such right
together with the Debentures with respect to which the right is being exercised,
duly endorsed for transfer.
Change in Control
A "Change in Control" of the Company means (i) the acquisition by any
person of beneficial ownership, directly or indirectly, through a purchase,
merger or other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such person to exercise 50% or more of
the total voting power of all shares of capital stock of the Company entitled to
vote generally in the elections of directors (any shares of voting stock of
which such person or group is the beneficial owner that are not then outstanding
being deemed outstanding for purposes of calculating such percentage), other
than any such acquisition by the Company, any subsidiary of the Company or any
employee benefit plan of the Company existing on the date of the Indenture; or
(ii) any consolidation or merger of the Company with or into any other person,
any merger of another person into the Company, or any conveyance, sale,
transfer, or lease of all or substantially all of the assets (other than (a) any
such transaction (x) which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock, and (y) pursuant
to which the holders of 50% or more of the total voting power of all shares of
capital stock of the Company entitled to vote generally in elections of
directors immediately prior to such transaction have the entitlement to
exercise, directly or indirectly, 50% or more of the total voting power of all
shares of capital stock of the continuing or surviving corporation entitled to
vote generally in elections of directors of the continuing or surviving
corporation immediately after such transaction and (b) a merger which is
effected solely to change the jurisdiction of incorporation of the Company and
results in a reclassification, conversion or exchange of outstanding shares of
Common Stock into solely shares of common stock); provided, that a Change of
Control shall not be deemed to have occurred if the closing price per share on
any five trading days within the period of ten consecutive trading days ending
immediately after the later of the date of the Change of Control or the date of
the public announcement of the Change of Control (in the case of a Change of
Control under the foregoing subclause (i)) or the period of ten consecutive
trading days ending immediately prior to the date of the Change of Control (in
the case of a Change in Control under the foregoing subclause (ii) shall equal
or exceed 105% of the conversion price in effect on such trading day.
S-34
No quantitative or other established meaning has been given to the
phrase "all or substantially all" (which appears in the definition of Change in
Control) by courts which have interpreted this phrase in various contexts. In
interpreting this phrase, courts make a subjective determination as to the
portion of assets conveyed, considering such factors as the value of assets
conveyed and the proportion of an entity's income derived from the assets
conveyed. To the extent the meaning of such phrase is uncertain, uncertainty
will exist as to whether or not a Change in Control may have occurred (and,
accordingly, whether or not the holders of Debentures will have the right to
require the Company to repurchase their Debentures).
The occurrence of a Change in Control would, in most cases, permit the
Company's lenders to require prepayment of some or all amounts outstanding under
the Company's short-term and long-term debt agreements. In the event of a Change
in Control, any repurchase of the Debentures could, absent payment in full of
any amounts outstanding under such credit facilities or waiver, be prevented by
the subordination provisions of the Debentures. See "Subordination of
Debentures." Failure by the Company to repurchase the Debentures when required
will result in an Event of Default with respect to the Debentures whether or not
such repurchase is permitted by the subordination provisions. The right to
require the Company to repurchase the Debentures could delay or deter a Change
in Control of the Company, whether or not such Change in Control were supported
by the Board of Directors of the Company.
If a Change in Control occurs, there can be no assurance that the
Company would have sufficient funds or financing to repay any Senior
Indebtedness then required to be repaid or to repurchase any or all Debentures
then required to be repurchased under the Indenture.
If an offer is made to repurchase Debentures as a result of a Change
in Control, the Company intends to comply with all tender offer rules, including
but not limited to Section 13(e) and 14(e) under the Exchange Act and Rules
13c-1 and 14c-1 thereunder, to the extent applicable to such offer.
Subordination of Debentures
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, the
payment of the principal of and premium, if any, and interest on the Debentures
will be subordinated, to the extent provided in the Subordinated Indenture, in
right of payment to the prior payment in full of all Senior Indebtedness.
Except as provided pursuant to a supplemental indenture or a board
resolution of the Company, no payment in respect of the Debentures will be made
if, at the time of such payment, there exists a default in payment of all or any
portion of any Senior Indebtedness, and such default has not been cured or
waived in writing or the benefits of this sentence waived in writing by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuation of any event of default (other than a default referred to in the
immediately preceding sentence) with respect to any Senior Indebtedness
permitting the holders to accelerate the maturity thereof and upon written
notice thereof given to the Trustee, with a copy to the Company, by any holder
of such Senior Indebtedness or its representative, then, unless and until such
an event of default has been cured or waived or has ceased to exist, no payment
will be made by the Company with respect to the principal of or interest on the
Debentures or to acquire any of the Debentures or on account of the redemption
provisions for the Debentures; provided, however, that if the holders of the
Senior Indebtedness to which the default relates have not declared such Senior
indebtedness to be immediately due and payable within 90 days after the
occurrence of such default (or have declared such Senior Indebtedness to be
immediately due and payable and within such period rescind such declaration of
acceleration), then the Company will resume making any and all required payments
in respect of the Debentures (including any missed payments). Only one payment
blockage period under the immediately preceding sentence may be commenced within
any consecutive 270-day period with respect to the Debentures. No event of
default which existed or was continuing on the date of the commencement of any
90-day payment blockage period with respect to the Senior Indebtedness
initiating such payment blockage period will be made the basis for the
commencement of a second payment blockage period by a Holder or representative
of such Senior Indebtedness whether or not
S-35
within a period of 270 consecutive days unless such event of default has been
cured or waived for a period of not less than 90 consecutive days (and, in the
case of any such waiver, no payment will be made by the Company to the holders
of Senior Indebtedness in connection with such waiver other than amounts due
pursuant to the terms of the Senior Indebtedness as in effect at the time of
such default).
Senior Indebtedness is defined in the Subordinated Indenture as
Indebtedness (as defined below) of the Company outstanding at any time except
Indebtedness that by its terms is subordinate in right of payment to the
Debentures or Indebtedness that is not otherwise senior in right of payment to
the Debentures. Senior Indebtedness does not include Indebtedness of the Company
to any of its subsidiaries. Indebtedness is defined with respect to any person
as the principal of, and premium, if any, and interest on (a) all indebtedness
of such person for borrowed money (including all indebtedness evidenced by
notes, bonds, debentures or other securities sold by such person for money), (b)
all indebtedness incurred by such person in the acquisition (whether by way of
purchase, merger, consolidation or otherwise and whether by such person or
another person) of any business, real property or other assets (except assets
acquired in the ordinary course of conduct of the acquiror's usual business),
(c) guarantees by such person of indebtedness described in clause (a) or (b) of
any other person, (d) all renewals, extensions, refundings, deferrals,
restructurings, amendments and modifications of any such indebtedness,
obligation or guarantee (e) all reimbursement obligations of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person, (f) all capital lease obligations of such
person, and (g) all net obligations of such person under interest rate swap or
similar agreements of such person. There are no restrictions in the Subordinated
Indenture upon the creation of additional Senior Indebtedness by the Company, or
on the creation of any indebtedness by the Company or any of its subsidiaries.
As of June 28, 1997, the Company had Senior Indebtedness (excluding accrued
interest) of approximately $120 million.
By reason of the subordination provisions described above, in the
event of insolvency, funds which would otherwise be payable to holders of the
Debentures will be paid to the holders of Senior Indebtedness to the extent
necessary to pay Senior Indebtedness in full. As a result of these payments,
general creditors of the Company may recover less, ratably, than holders of
Senior Indebtedness and such general creditors may recover more, ratably, than
holders of Debentures or other subordinated indebtedness of the Company.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain federal income tax
considerations relevant to holders of the Debentures. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
Regulations, Internal Revenue Service ("IRS") rulings, and judicial decisions
now in effect, all of which are subject to change (possibly with retroactive
effect) or different interpretations.
This discussion does not deal with all aspects of federal income
taxation that may be relevant to holders of the Debentures or shares of Common
Stock and does not deal with tax consequences arising under the laws of any
foreign, state or local jurisdiction. This discussion is for general information
only, and does not purport to address all of the tax consequences that may be
relevant to particular purchasers in light of their personal circumstances, or
to certain types of purchasers (such as certain financial institutions,
insurance companies, tax-exempt entities, dealers in securities or persons who
hold the Debentures or Common Stock in connection with a straddle, foreign
corporations and other holders who are not United States persons, citizens or
residents) who may be subject to special rules. This discussion assumes that
each holder holds the Debentures and the shares of Common Stock received upon
conversion thereof as capital assets.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR
PARTICIPATION IN THIS OFFERING, OWNERSHIP AND DISPOSITION OF THE DEBENTURES,
INCLUDING CONVERSION OF THE DEBENTURES, AND THE EFFECT THAT THEIR PARTICULAR
CIRCUMSTANCES MAY HAVE ON SUCH TAX CONSEQUENCES.
S-36
Interest on Debentures
Interest paid on a Debenture will be taxable to a holder as ordinary
interest income in accordance with the holder's method of tax accounting at the
time that such interest is accrued or (actually or constructively) received. The
Company anticipates that the Debentures will not be issued with original issue
discount ("OID") within the meaning of the Code.
Adjustment of Conversion Price or Ratio
The conversion ratio of the Debentures is subject to adjustment under
certain circumstances. Section 305 of the Code and the Treasury Regulations
issued thereunder may treat the holders of the Debentures as having received a
constructive distribution, resulting in ordinary income (subject to a possible
dividends-received deduction in the case of corporate holders) to the extent of
the Company's current and/or accumulated earnings and profits, if and to the
extent that certain adjustments in the conversion ratio (particularly an
adjustment to reflect a taxable dividend to holders of Common Stock) increase
the proportionate interest of a holder of Debentures in the fully diluted Common
Stock, whether or not such holder ever exercises its conversion privilege. The
Company does not anticipate paying a cash distribution in the event holders of
the Debentures are treated as having received a constructive distribution.
Therefore, holders of the Debentures would have to utilize other assets to
satisfy any tax liability arising from a constructive distribution. Moreover, if
there is not a full adjustment to the conversion ratio of the Debentures to
reflect a stock dividend or other event increasing the proportionate interest of
the holders of outstanding Common Stock in the assets or earnings and profits of
the Company, then such increase in the proportionate interest of the holders of
the Common Stock generally will be treated as a distribution to such holders,
taxable as ordinary income (subject to a possible dividends-received deduction
in the case of corporate holders) to the extent of the Company's current and/or
accumulated earnings and profits. The Debentures contain provisions intended to
cause a full adjustment to the conversion ratio of the Debentures, and in
addition the Board of Directors may reduce, in its discretion, the conversion
price as it deems advisable to avoid or diminish any such adverse consequence to
holders of Common Stock. Accordingly, the holders of Common Stock should not be
deemed to receive any such taxable dividend distribution under Section 305 of
the Code. See "Description of Debentures Conversion."
Sale or Exchange of Debentures or Shares of Common Stock
In general, a holder of a Debenture will recognize gain or loss upon
the sale, redemption, retirement or other disposition of the Debenture measured
by the difference between the amount of cash and the fair market value of any
property received (except to the extent attributable to the payment of accrued
interest) and the holder's adjusted tax basis in the Debenture. A holder's tax
basis in a Debenture generally will equal the cost of the Debenture to the
holder increased by the amount of market discount, if any, previously taken into
income by the holder or decreased by any bond premium theretofore amortized by
the holder with respect to the Debenture. In general, each holder of Common
Stock into which the Debentures have been converted will recognize gain or loss
upon the sale, exchange, redemption, or other disposition of the Common Stock
under rules similar to those applicable to the Debentures. Special rules may
apply to redemptions of Common Stock which may result in the amount paid being
treated as a dividend. Subject to the market discount rules discussed below, the
gain or loss on the disposition of the Debentures or shares of Common Stock will
be capital gain or loss and, for individuals will be mid-term gain or loss if
the Debentures or shares of Common Stock have been held for more than one year
but not more than 18 months at the time of such disposition, subject to a
maximum federal tax rate of 28 percent. If the Debentures or shares of Common
Stock have been held by an individual taxpayer for more than 18 months at the
time of disposition, then such individual's adjusted net capital gain therefrom
is subject to a maximum federal tax rate of 20 percent (and in tax years
beginning after December 31, 2000, an 18 percent maximum federal tax rate will
apply to such gain if the holding period for the Debentures or shares of Common
Stock is more than 5 years).
S-37
Conversion into Common Stock
A holder of a Debenture will not recognize gain or loss on the
conversion of the Debenture into shares of Common Stock, except to the extent
that the Common Stock issued upon the conversion is attributable to accrued
interest on the Debenture. The holder's aggregate tax basis in the shares of
Common Stock received upon conversion of the Debenture will be equal to the
holder's aggregate basis in the Debenture exchanged therefor (less any portion
thereof allocable to cash received in lieu of a fractional share). The holding
period of the shares of Common Stock received by the holder upon conversion of
the Debenture will include the period during which the holder held the Debenture
prior to the conversion.
Cash received in lieu of a fractional share of Common Stock should be
treated as a payment in exchange for such fractional share. Gain or loss
recognized on the receipt of cash paid in lieu of such fractional shares
generally will equal the difference between the amount of cash received and the
amount of tax basis allocable to the fractional shares.
Market Discount
The resale of a Debenture may be affected by the "market discount"
provisions of the Code. For this purpose, the market discount on a Debenture
will generally be equal to the amount, if any, by which the stated redemption
price at maturity of the Debenture immediately after its acquisition exceeds the
holder's tax basis in the Debenture. Subject to a de minimis exception, these
provisions generally require a holder of a Debenture acquired at a market
discount to treat as ordinary income any gain recognized on the disposition of
such Debenture to the extent of the "accrued market discount" on such Debenture
at the time of disposition. In general, market discount on a Debenture will be
treated as accruing on a straight-line basis over the term of such Debenture,
or, at the election of the holder, under a constant yield method.
In addition, any holder of a Debenture acquired at a market discount
may be required to defer the deduction of a portion of the interest on any
indebtedness incurred or maintained to purchase or carry the Debenture until the
Debenture is disposed of in a taxable transaction. The foregoing rule will not
apply if the holder elects to include accrued market discount in income
currently.
If a holder acquires a Debenture at a market discount and receives
Common Stock upon conversion of the Debenture, the amount of accrued market
discount with respect to the converted Debenture through the date of the
conversion should be treated as ordinary income on the disposition of the Common
Stock.
Dividends on Shares of Common Stock
Distributions on shares of Common Stock will constitute dividends for
federal income tax purposes to the extent of current or accumulated earnings and
profits of the Company as determined under federal income tax principles.
Dividends paid to holders that are corporations may qualify for the
dividends-received deduction. Individuals, partnerships, trusts, and certain
corporations, including certain foreign corporations, are not entitled to the
dividends-received deduction.
To the extent, if any, that a holder receives a distribution on shares
of Common Stock that would otherwise constitute a dividend for federal income
tax purposes but that exceeds current and accumulated earnings and profits of
the Company, such distribution will be treated first as a non-taxable return of
capital reducing the holder's basis in the shares of Common Stock. Any such
distribution in excess of the holder's basis in the shares of Common Stock will
be treated as a capital gain.
Information Reporting and Backup Withholding
Information reporting and backup withholding may apply to payments of
interest or dividends on or the proceeds of the sale or other disposition of the
Debentures or shares of Common Stock made by the Company with
S-38
respect to certain noncorporate holders. Such holders generally will be subject
to backup withholding at a rate of 31% unless the recipient of such payment
supplies a taxpayer identification number, certified under penalties of perjury,
as well as certain other information, or otherwise establishes, in the manner
prescribed by law, an exemption from backup withholding. Any amount withheld
under backup withholding is allowable as a credit against the holder's federal
income tax, upon furnishing the required information.
LEGAL MATTERS
The validity of the Securities offered hereby have been passed upon
for the Company by McGrath, North, Mullin & Kratz, P.C., Omaha, Nebraska and for
the Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of InaCom Corp. as
of December 28, 1996 and December 30, 1995, and for each of the years in the
three-year period ended December 28, 1996, have been included herein and
incorporated by reference in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
INACOM CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited)
Independent Auditors' Report..................................................................... F-2
Consolidated Statements of Operations-- Three-Year Period Ended December 28, 1996................ F-3
Consolidated Balance Sheets-- December 28, 1996 and December 30, 1995............................ F-4
Consolidated Statements of Stockholders' Equity -- Three-Year Period
Ended December 28, 1996................................................................. F-5
Consolidated Statements of Cash Flows-- Three-Year Period Ended December 28, 1996................ F-6
Notes to Consolidated Financial Statements-- Three-Year Period Ended December 28, 1996........... F-7
SCHEDULE-- Valuation and Qualifying Accounts............................................ F-16
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND
SIX MONTHS ENDED JUNE 28, 1997 (Unaudited)
Condensed and Consolidated Balance Sheets-- June 28, 1997 and December 28, 1996......... F-17
Condensed and Consolidated Statement of Operations -- Thirteen Weeks Ended June 28, 1997
and June 29, 1996 and Twenty-Six Weeks Ended June 28, 1997 and June 29, 1996............ F-18
Condensed and Consolidated Statement of Cash Flows -- Twenty-Six Weeks Ended June 28, 1997
and June 29, 1996....................................................................... F-19
Notes to Condensed and Consolidated Financial Statements -- Twenty-Six Weeks Ended
June 28, 1997........................................................................... F-20
All other schedules have been omitted as the required information is
inapplicable or the information is included in the consolidated financial
statements or related notes.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
InaCom Corp.:
We have audited the accompanying consolidated financial statements of
InaCom Corp. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InaCom Corp.
and subsidiaries at December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 28, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
February 21, 1997
F-2
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three-year period ended December 28, 1996
(Amounts in thousands, except per share data)
.......................................................... 1996 1995 1994
----------- ------------ ------------
Revenues:
Computer products......................................... $ 2,885,019 2,047,215 1,680,397
Computer services......................................... 136,888 95,476 85,406
Communications products and services...................... 80,148 57,653 34,736
----------- ------------ ------------
.......................................................... 3,102,055 2,200,344 1,800,539
----------- ------------ ------------
Direct costs:
Computer products......................................... 2,722,368 1,924,829 1,571,700
Computer services......................................... 33,660 27,877 32,900
Communications products and services...................... 62,668 43,832 27,220
----------- ------------ ------------
.......................................................... 2,818,696 1,996,538 1,631,820
----------- ------------ ------------
Gross margin.............................................. 283,359 203,806 168,719
Selling, general and administrative expenses ................. 231,235 169,338 160,437
----------- ------------ ------------
Operating income.......................................... 52,124 34,468 8,282
Interest expense.............................................. 20,405 14,635 12,031
----------- ------------ ------------
Earnings (loss) before income taxes ...................... 31,719 19,833 (3,749)
Income tax expense (benefit).................................. 12,986 8,126 (1,493)
----------- ------------ -----------
Net earnings (loss)....................................... $ 18,733 11,707 (2,256)
Earnings (loss) per share:
Primary................................................... $ 1.76 1.14 (.22)
Fully diluted............................................. $ 1.64 1.14 (.22)
Common shares and equivalents outstanding:
Primary................................................... 10,600 10,300 10,300
Fully diluted............................................. 12,000 10,300 10,300
See accompanying notes to consolidated financial statements.
F-3
INACOM CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 1996 and December 30, 1995
(Amounts in thousands, except share data)
Assets 1996 1995
------ ----------- -----------
Current assets:
Cash and cash equivalents......................................... $ 31,410 20,690
Accounts receivable, less allowance for doubtful
accounts of $4,385 in 1996 and $3,537 in 1995................ 288,407 160,306
Deferred income taxes............................................. 3,554 4,202
Inventories....................................................... 386,592 352,948
Other current assets.............................................. 2,335 1,794
----------- -----------
Total current assets......................................... 712,298 539,940
----------- -----------
Property and equipment, at cost....................................... 116,970 85,922
Less accumulated depreciation..................................... 57,845 44,421
----------- -----------
Net property and equipment................................... 59,125 41,501
----------- -----------
Other assets, net of accumulated amortization......................... 27,531 17,831
Cost in excess of net assets of business acquired,
net of accumulated amortization................................... 48,646 24,966
----------- -----------
............................................................. $ 847,600 624,238
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................. $ 406,753 331,221
Notes payable and current installments of long-term debt.......... 140,770 83,526
Income taxes payable.............................................. 3,531 384
Other current liabilities............................................. 60,941 33,869
----------- -----------
Total current liabilities.................................... 611,995 449,000
----------- -----------
Long-term debt, excluding current installments........................ 55,250 23,667
Other long-term liabilities........................................... 73 --
Deferred income taxes................................................. 3,452 2,796
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 10,850,008 shares
in 1996 and 10,040,000 in 1995............................... 1,085 1,004
Additional paid-in capital........................................ 98,153 89,528
Retained earnings............................................ 77,607 58,874
----------- -----------
............................................................. 176,845 149,406
Less:
Cost of common shares in treasury of 19,989 in 1995............... -- (161)
Unearned restricted stock......................................... (15) (470)
----------- -----------
Total stockholders' equity................................... 176,830 148,775
----------- -----------
Commitments and contingent liabilities................................
............................................................. $ 847,600 624,238
See accompanying notes to consolidated financial statements.
F-4
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three-year period ended December 28, 1996
(Amounts in thousands, except share data)
Additional Unearned Total
Common paid-in Retained Treasury restricted stockholders'
stock capital earnings stock stock equity
Balance at December 25, 1993....... $ 1,004 88,928 49,423 (2,034) (830) 136,491
Net loss........................... - - (2,256) - - (2,256)
Issuance of 3,400 treasury shares
as director compensation........... - 11 - 30 - 41
Issuance of 35,253 treasury
shares under stock option plans.... - 209 - 310 - 519
Issuance of 16,800 treasury shares
as stock awards, net of forfeitures - 166 - 161 468 795
--- -------- ----- ----- --- ---------
Balance at December 31, 1994....... 1,004 89,314 47,167 (1,533) (362) 135,590
Net earnings....................... - - 11,707 - - 11,707
Issuance of 4,400 treasury shares
as director compensation........... - (1) - 39 - 38
Issuance of 89,993 treasury
shares under stock option plans.... - 240 - 790 - 1,030
Issuance of 61,800 treasury shares
as stock awards, net of forfeitures - (25) - 543 (108) 410
--- ------- ----- ------ --- ---------
Balance at December 30, 1995....... 1,004 89,528 58,874 (161) (470) 148,775
Net earnings....................... - - 18,733 - - 18,733
Issuance of 691,131 shares in connection
with business combinations......... 69 6,581 - - - 6,650
Issuance of 132,966 treasury and common
shares under stock option plans.... 12 1,956 - 161 - 2,129
Issuance of 3,400 shares
as director compensation........... - 60 - - - 60
Issuance of 2,500 shares
as stock awards, net of forfeitures - 28 - - 455 483
-- ------- ------ --- --- ---------
Balance at December 28, 1996....... $ 1,085 98,153 77,607 - (15) 176,830
See accompanying notes to consolidated financial statements.
F-5
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three-year period ended December 28, 1996
(Amounts in thousands)
1996 1995 1994
----------- ----------- -------
Cash flows from operating activities:
Net earnings (loss)....................................... $ 18,733 11,707 (2,256)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization......................... 21,814 19,059 19,766
Changes in assets and liabilities, net
of effects from business combinations:
Accounts receivable.............................. (123,648) (75,333) (22,496)
Inventories...................................... (31,794) (124,296) (41,783)
Other current assets............................. 97 (610) 463
Accounts payable................................. 71,162 105,100 122,961
Other liabilities................................ 20,896 5,444 5,983
Income taxes..................................... 4,451 1,195 (2,192)
----------- ----------- -----------
Net cash provided (used) by
operating activities...................... (18,289) (57,734) 80,446
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment....................... (26,240) (10,346) (14,910)
Business combinations..................................... (23,386) - -
Payments from (advances of) notes receivable.............. 446 (1,872) 917
Other, including advances to affiliates................... (11,950) (1,051) (1,816)
----------- ----------- -----------
Net cash used in investing activities........ (61,130) (13,269) (15,809)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt ..................... (30,334) (6,667) -
Proceeds from receivables sold............................ - 100,000 -
Proceeds from (payments of) notes payable................. 63,094 (13,184) (81,314)
Proceeds from long-term debt.............................. 55,250 - 17,000
Proceeds from the exercise of employee stock options...... 2,129 1,030 519
----------- ----------- -----------
Net cash provided by (used in)
financing activities...................... 90,139 81,179 (63,795)
----------- ----------- -----------
Net increase in cash and cash equivalents...................... 10,720 10,176 842
Cash and cash equivalents, beginning of year................... 20,690 10,514 9,672
----------- ----------- -----------
Cash and cash equivalents, end of year......................... $ 31,410 20,690 10,514
See accompanying notes to consolidated financial statements.
F-6
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The consolidated financial statements include the accounts of InaCom
Corp. (Company) and its wholly-owned subsidiaries. The Company is a leading
provider of management technology services which include technology procurement
and distribution of microcomputer systems, workstations, networking and
telecommunications equipment, systems integration and support services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) 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 December 28, 1996, $37.3 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 December 28, 1996,
the implicit interest rate on the receivable sale transaction was 5.9%. On
January 13, 1997, the agreement was amended to sell an additional $100 million
of accounts receivable.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of computer hardware, software, voice and data equipment and
related materials.
(d) Other Assets
Other assets include vendor authorization rights and long-term notes
receivable. Vendor authorization rights are being amortized over 10 years.
(e) Cost in Excess of Net Assets of Business Acquired
The excess of the cost over the carrying value of assets of business
acquired is being amortized over 20 years. The Company assesses the
recoverability of intangible assets by determining whether the amortization of
the asset balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
(f) Depreciation
Depreciation is provided over the estimated useful lives of the
respective assets ranging from 3 to 31 years using the straight-line method.
F-7
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(h) Earnings/(Loss) Per Common Share
Primary earnings/(loss) per share of common stock have been computed on
the basis of the weighted average number of shares of common stock outstanding
after giving effect to equivalent common shares from dilutive stock options.
Fully diluted earnings/(loss) per share further assumes the conversion of the
Company's convertible subordinated debentures for the period they were
outstanding.
(i) Revenue and Expense Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. Revenues from consulting and other services are recognized as the
Company performs the services. Revenues from maintenance and extended warranty
agreements are recognized ratably over the term of the agreement. Extended
warranty costs are accounted for on an accrual basis and are recognized under
the sales method.
(j) 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.
(k) Risks and Uncertainties
Financial instruments which potentially expose the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells product to a large number of customers in many different
industries and geographies. To minimize credit concentration risk, the Company
utilizes several financial services organizations which purchase accounts
receivable and perform ongoing credit evaluations of its customers' financial
conditions.
The Company's business is dependent in large measure upon its
relationship with key vendors since a substantial portion of the Company's
revenue is derived from the sales of the products of such key vendors.
Termination of, or a material change to the Company's agreements with these
vendors, or a material decrease in the level of marketing development programs
offered by manufacturers, or an insufficient or interrupted supply of vendors'
product would have a material adverse effect on the Company's business.
F-8
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(l) Disclosures About Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate fair value because of
the short maturity of these instruments. The fair values of each of the
Company's long-term debt instruments are based on the amount of future cash
flows associated with each instrument discounted using the Company's current
borrowing rate for similar debt instruments of comparable maturity. The
estimated fair value of the Company's long-term debt at December 28, 1996
approximates book value.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers cash and temporary cash investments with a maturity of three months or
less to be cash equivalents.
2. BUSINESS COMBINATIONS
During 1996, the Company completed several acquisitions. In April 1996,
the Company acquired Technology Express, a network integrator in the Nashville,
Tennessee market for consideration of approximately $4.8 million in cash and
89,286 shares of common stock in a transaction accounted for as a purchase. The
excess purchase price over the estimated fair value of the net assets acquired
was $6.2 million and is being amortized using the straight-line method over 20
years.
In August 1996, the Company acquired Computer Access International for
consideration including approximately $7.6 million in cash and 238,209 shares of
common stock in a transaction accounted for as a purchase. The excess purchase
price over the estimated fair value of the net assets acquired was $8.0 million
and is being amortized using the straight line method over 20 years.
In December 1996, the Company acquired Gorham Clark, Inc., a network
consulting business in New York, New York for consideration of approximately
$12.0 million in cash in a transaction accounted for as a purchase. The Company
may also issue up to a maximum of 122,278 shares of common stock over the next
two years, contingent upon future results of the acquired business. The excess
purchase price over the estimated fair value of the net assets acquired was
$10.0 million and is being amortized using the straight-line method over 20
years.
In December 1996, the Company acquired all the issued and outstanding
shares of Perigee Communications Inc. of Minneapolis, Minnesota and Networks,
Inc. of Miami, Florida for 272,726 and 90,910 shares of common stock,
respectively, in transactions accounted for as "poolings of interest." The
Company's consolidated financial statements for the year ended December 28, 1996
include the fourth fiscal quarters' activity for the acquired businesses. Prior
period consolidated financial statements were not restated as the results of
operations would not have been materially different than those previously
reported by the Company. The effect of the immaterial poolings was to increase
stockholders' equity by approximately $643,000.
F-9
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
If the above business combinations had occurred on December 26, 1993,
the pro forma operations of the Company would not have been materially different
than that reported in the accompanying consolidated statements of operations.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
1996 1995
---- ----
Land, buildings and improvements............. $ 13,911 10,541
Furniture, fixtures and equipment............ 27,875 18,392
Computer equipment ..................... 53,239 35,340
Computer parts held for repair and exchange.. 21,945 21,649
---------- -------------
$ 116,970 85,922
4. INCOME TAXES
Income tax expense (benefit) consists of the following:
1996 1995 1994
---------- ---------- --------
Current:
Federal............. $ 10,195 6,151 487
State......... 1,488 943 92
Deferred:
Federal....... 1,209 897 (1,789)
State......... 94 135 (283)
---------- ---------- --------
$ 12,986 8,126 (1,493)
The reconciliation of the statutory Federal income tax rate and the effective
tax rate are as follows:
1996 1995 1994
---------- ----- --------
Statutory Federal income tax rate ..... 35.0% 35.0% 34.0%
State income taxes, net of
Federal benefit .............. 3.2 3.6 4.7
Other ........................ 2.8 2.4 1.1
---- ---- ----
41.0% 41.0% 39.8%
F-10
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
.................................... 1996 1995
------------ --------
Deferred tax assets:
Valuation reserves.................. $ 5,726 3,324
Accrued expenses not deducted until paid 2,188 1,275
Other............................... - 2
------------ ------------
Total deferred tax assets........... 7,914 4,601
------------ ------------
Deferred tax liabilities:
Vendor discounts.................... 2,766 -
Depreciation........................ 4,241 2,725
Other............................... 805 470
------------ ------------
Total deferred tax liabilities...... 7,812 3,195
------------ ------------
Net deferred tax assets............. $ 102 1,406
There was no valuation allowance for deferred tax assets at December 28, 1996 or
December 30, 1995.
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company's primary sources of liquidity are provided through a
working capital financing agreement for $350.0 million, a revolving credit
facility of $40.0 million and convertible subordinated debentures of $55.25
million. The $350.0 million working capital financing agreement, which is
provided by an unrelated financial services organization, expires June 29, 1998.
At December 28, 1996, $100.8 million was outstanding under the working capital
line and the interest rate was 7.4% based on LIBOR. The working capital
financing agreement is secured by accounts receivable and inventories.
The Company entered into a revolving credit facility agreement in
February 1996 with an unrelated financial institution. The $40.0 million
revolving credit facility agreement expires in February 1998. At December 28,
1996, $40.0 million was outstanding under the revolving credit facility and the
interest rate was 6.8% based on LIBOR. The revolving credit facility is secured
by accounts receivable and inventories.
The working capital financing agreement and the revolving credit
facility agreement contain certain restrictive covenants, including the
maintenance of minimum levels of working capital, tangible net worth,
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 agreements at December 28, 1996.
F-11
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
A summary of long-term debt follows:
1996 1995
------------ ------------
Private placement notes (a).............................. $ - 30,334
Convertible subordinated debentures (b).................. 55,250 -
------------ ------------
Total long-term debt............................. 55,250 30,334
Less current installments................................ - 6,667
------------ -------------
Long-term debt, excluding current installments... $ 55,250 23,667
(a) The private placement notes were held by unaffiliated
insurance companies. The balances of the notes were paid in
full in December 1996.
(b) In June 1996, the Company issued $55.25 million of 6.0%
convertible subordinated debentures due June 15, 2006. The
debentures are convertible into common stock of the Company at
a conversion price of $24.00 per share, subject to adjustments
under certain circumstances, beginning on September 19, 1996.
The debentures are not redeemable by the Company prior to June
16, 2000 and thereafter the Company may redeem the debentures
at various premiums to principal amount. The debentures may
also be redeemed at the option of the holder at any time prior
to June 16, 2000 if there is a Change in Control (as defined
in the indenture) at a price equal to 100% of the principal
amount plus accrued interest at the date of redemption. The
net proceeds from the sale of the 6% debentures were used to
reduce a portion of the outstanding balance of the working
capital financing agreement which carried an interest rate at
the time of the debenture sale of 7.3%.
6. CREDIT ARRANGEMENTS
The Company has floor plan agreements to take advantage of vendor
financing programs. The agreements were secured by $122.7 million of the
Company's inventory at December 28, 1996 and $111.9 million at December 30,
1995. The Company has entered into dealer working capital financing agreements
with several financial services organizations which purchase, primarily,
accounts receivable from the Company. The Company had contingent liabilities of
$1.8 million at December 28, 1996 and $7.9 million at December 30, 1995 relating
to these agreements.
7. LEASES
The Company operates in leased premises which include the general
offices, warehouse facilities and Company-owned branches. Operating lease terms
range from monthly to ten years and generally provide for renewal options. Rent
expense for operating leases was approximately $12.0 million, $9.8 million, and
$8.6 million for the three years ended December 28, 1996, respectively.
F-12
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
Future minimum operating lease obligations for the years 1997 through
2001 are $12.6 million, $10.6 million, $8.9 million, $6.6 million and $5.7
million, respectively. It is anticipated that leases will be renewed or replaced
as they expire such that future lease obligations will approximate rent expense
for 1996.
8. EMPLOYEE RETIREMENT BENEFIT PLAN
The Company maintains a qualified savings plan under Section 401(k) of
the Internal Revenue Code (IRC) which covers substantially all full-time
employees. Annual contributions to the qualified plan, based on participant's
annual pay, are made by the Company. Participants may also elect to make
contributions to the plan. Employee contributions are matched by the Company up
to limits prescribed by the IRC. Company contributions to the plan approximated
$3.3 million in 1996, $2.4 million in 1995 and $1.8 million in 1994.
The Company maintains a nonqualified savings plan for employees whose
benefits under the qualified savings plans are reduced because of limitations
under Federal tax laws. Contributions made to this plan were not material.
9. LITIGATION
The Company is involved in a limited number of legal actions.
Management believes that the ultimate resolution of all pending litigation will
not have a material adverse effect on the Company's consolidated financial
statements.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are summarized as follows:
................................. 1996 1995 1994
----------- ----------- -------
Interest paid......................... $ 19,611 14,054 12,599
Income taxes paid..................... 8,176 6,931 890
Components of cash used for acquisitions as reflected in the
consolidated statements of cash flows are summarized as follows:
1996
Fair value of assets acquired $ 41,965
Liabilities assumed (11,436)
Fair value of common stock issued (7,143)
-------------
Cash paid at closing, net of cash acquired $ 23,386
F-13
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
11. STOCK OPTION AND AWARD PROGRAMS
The Company has two stock plans approved by the shareholders in 1994
and 1990, and a nonqualified stock option plan approved by shareholders in 1987.
Options granted under the stock plans may be either nonqualified or incentive
stock options. The option price, vesting period and term under the stock plans
and the nonqualified stock option plan are set by the Compensation Committee of
the Board of Directors of the Company. The option price may not be less than the
fair market value per share at the time the option is granted. The vesting
period of options granted typically ranges from 2 to 3 years, and the term of
any option granted may not exceed ten years. The stock plans also permit the
issuance of restricted or bonus stock awards by the Compensation Committee. At
December 28, 1996, the Company had approximately 80,000 shares available for
issuance pursuant to subsequent grants under the plans.
Additional information as to shares subject to options is as follows:
Weighted
average
Number of Exercise price exercise
options per option price
Options outstanding at December 25, 1993 684,000 $ 5.85 to 19.75 13.73
Granted 193,500 8.00 to 12.00 10.20
Exercised (35,000) 7.25 to 14.62 11.74
Canceled (42,000) 7.02 to 14.50 12.21
-------------
Options outstanding at December 31, 1994 800,500 5.85 to 19.75 13.01
Granted 157,000 9.56 to 14.69 9.82
Exercised (90,000) 7.25 to 12.00 10.26
Canceled (68,500) 5.85 to 14.63 12.45
-------------
Options outstanding at December 30, 1995 799,000 5.85 to 19.75 12.76
Granted 36,500 35.56 35.56
Exercised (133,000) 5.85 to 14.63 10.77
Canceled (21,000) 5.85 to 14.63 9.56
-------------
Options outstanding at December 28, 1996 681,500 8.00 to 35.56 14.47
Exercisable at December 28, 1996 428,000 $ 8.00 to 19.75 12.74
F-14
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Accordingly, the Company
has not recognized compensation expense for its options granted in 1995 and
1996. In 1996, the Company adopted FASB Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. FASB Statement No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in FASB Statement No. 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB Statement
No. 123.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $30.96 and $7.83, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate of
6.1%, expected volatility factor of 192.9%, and an expected life of 2.5 years;
1995 - expected dividend yield 0.0%, risk-free interest rate of 5.7%, expected
volatility factor of 133.8%, and an expected life of 3.7 years.
Since the Company applies APB Opinion No. 25 in accounting for its
plans, no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company recorded compensation cost
based on the fair value at the grant date for its stock options under FASB
Statement No. 123, the Company's net earnings for 1996 and 1995 would have been
reduced by approximately 1.9% and 0.6%, respectively, and the Company's earnings
per share, fully diluted, for 1996 and 1995 would have been reduced by
approximately 1.2% and 0.9%, respectively.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under FASB Statement No. 123 is not reflected in the pro forma net earnings
amounts presented above, because compensation cost is reflected over the
options' vesting period of two and three years for the 1996 and 1995 options,
respectively. Compensation costs for options granted prior to January 1, 1995
are not considered.
F-15
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
SCHEDULE
INACOM CORP. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(Amounts in thousands)
Balance at Charged to Amounts Balance
beginning costs and written at end
of period expenses off(1) of period
---------- -------- ----------- ---------
Fiscal year ended December 28, 1996 -
Allowance for doubtful accounts.............. $ 3,537 1,626 778 4,385
Fiscal year ended December 30, 1995 -
Allowance for doubtful accounts.............. $ 2,626 2,308 1,397 3,537
Fiscal year ended December 31, 1994 -
Allowance for doubtful accounts.............. $ 2,784 1,691 1,849 2,626
(1) The deductions from reserves are net of recoveries.
F-16
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
June 28, December 28,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 30,720 31,410
Accounts receivable, net................................................ 257,358 288,407
Inventories............................................................. 464,145 386,592
Other current assets.................................................... 8,843 5,889
------------- ------------
Total current assets............................................... 761,066 712,298
------------- ------------
Other assets, net........................................................... 45,513 27,531
Cost in excess of net assets of business acquired, net of
accumulated amortizations................................................ 68,659 48,646
Property and equipment, net................................................. 69,674 59,125
------------- ------------
............................................................... $ 944,912 847,600
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 479,746 406,753
Notes payable........................................................... 120,000 140,770
Other current liabilities............................................... 79,451 64,472
------------- ------------
Total current liabilities.......................................... 679,197 611,995
------------- ------------
Long-term debt.............................................................. 55,250 55,250
Other long-term liabilities................................................. 3,453 3,525
Stockholders' equity:
Capitol 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 11,537,315 in 1997 and 10,850,008 shares in 1996........ 1,153 1,085
Additional paid-in capital......................................... 116,298 98,153
Retained earnings.................................................. 89,561 77,607
------------- ------------
............................................................... 207,012 176,845
Less:
Unearned restricted stock.......................................... -- (15)
------------- ------------
Total stockholders' equity......................................... 207,012 176,830
------------- ------------
............................................................... $ 944,912 847,600
See accompanying notes to consolidated financial statements.
F-17
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
------------- ------------- ------------- ---------
Revenues:
Computer products............................... $ 884,952 718,585 $ 1,657,705 1,316,307
Computer services............................... 60,607 30,201 108,238 58,340
Communication products and services............. 26,655 21,074 47,961 37,294
------------ ------------- ------------- --------------
Total...................................... 972,214 769,860 1,813,904 1,411,941
------------ ------------- ------------- --------------
Direct costs:
Computer products............................... 836,876 677,760 1,565,625 1,241,991
Computer services............................... 14,881 7,347 28,380 15,550
Communications products and services............ 21,583 16,620 37,782 29,086
------------ ------------- ------------- --------------
................................................ 873,340 701,727 1,631,787 1,286,627
------------ ------------- ------------- --------------
Gross margin......................................... 98,874 68,133 182,117 125,314
Selling, general and administrative expenses......... 80,354 55,588 147,671 102,829
------------ ------------- ------------- --------------
Operating income..................................... 18,520 12,545 34,446 22,485
Interest expense..................................... 7,148 5,046 14,184 9,919
------------ ------------- ------------- --------------
Earnings before income tax........................... 11,372 7,499 20,262 12,566
Income tax expense .................................. 4,663 3,075 8,308 5,152
------------ ------------- ------------- --------------
Net earnings......................................... $ 6,709 4,424 $ 11,954 7,414
Earnings per share
Primary......................................... $ .58 .43 $ 1.04 .72
Fully diluted................................... $ .52 .42 .94 .71
Common shares and equivalents outstanding
Primary...................................... 11,600 10,300 11,500 10,300
Fully diluted................................ 13,900 10,700 13,800 10,500
See accompanying notes to consolidated financial statements.
F-18
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Twenty-Six Weeks Ended
June 28, June 29,
1997 1996
Cash flows from operating activities:
Net earnings ..................................................................... $ 11,954 7,414
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization................................................. 14,256 9,720
Increase in accounts receivable............................................... (55,200) (41,182)
(Increase) decrease in inventories............................................ (74,070) 48,585
Increase in other current assets.............................................. (2,599) (395)
Increase (decrease) in accounts payable....................................... 68,840 (69,691)
(Decrease) increase in other long-term liabilities............................ (83) 226
(Decrease) increase in other current liabilities.............................. (7,107) 13,219
----------- ---------
Net cash used in operating activities.................................... (44,009) (32,104)
----------- ---------
Cash flows from investing activities:
Additions to property and equipment............................................... (19,836) (10,016)
Proceeds from notes receivable.................................................... 100 1,605
Business combinations............................................................. (4,100) --
Increase in other assets.......................................................... (12,085) (10,472)
----------- ---------
Net cash used in investing activities......................................... (35,921) (18,883)
----------- ---------
Cash flows from financing activities:
Proceeds from receivables sold.................................................... 100,000 --
(Payments of) proceeds from short-term debt....................................... (20,770) 5,741
Payments of long-term debt........................................................ -- (6,667)
Proceeds from sale of convertible subordinated debentures......................... -- 55,250
Proceeds from exercise of stock options........................................... 10 808
----------- ---------
Net cash provided by financing activities..................................... 79,240 55,132
----------- ---------
Net (decrease) increase in cash and cash equivalents.................................. (690) 4,145
Cash and cash equivalents, beginning of the period.................................... 31,410 20,690
Cash and cash equivalents, end of the period.......................................... $ 30,720 24,835
See accompanying notes to consolidated financial statements.
F-19
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 28, 1996. The results of
operations for the thirteen and twenty-six weeks ended June 28, 1997 are not
necessarily indicative of the results for the entire fiscal year ending December
27, 1997.
2. ACCOUNTS RECEIVABLE
The Company has entered into an agreement to sell $200 million of accounts
receivable, with limited recourse, to an unrelated financial institution. The
agreement was initially entered into in June 1995 with respect to $100 million
of accounts receivable and was amended in January 1997 to sell an additional
$100 million of accounts receivable. New qualifying receivables are sold to the
financial institution as collections reduce previously sold receivables in order
to maintain a balance of $200 million sold receivables. On June 27, 1997, $46.6
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. On
June 28, 1997, the interest rate was 6.09%.
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. EARNINGS PER COMMON SHARE
Primary earnings per share of common stock have been computed on the basis
of the weighted average number of shares of common stock outstanding after
giving effect to equivalent common shares from dilutive stock options. Fully
diluted earnings per share further assumes the conversion of the Company's
convertible subordinated debentures for the period they were outstanding.
5. 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.
6. 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):
1997 1996
-------- ------
Interest paid.................. $ 14,310 $ 9,924
Income taxes paid.............. 7,574 1,126
F-20
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Inacom
has agreed to sell to each of the Underwriters named below, and each of such
Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc. and
PaineWebber Incorporated are acting as representatives, has severally agreed to
purchase from Inacom, the respective amount of Debentures set forth opposite its
name below:
Principal
Underwriter Amount
Goldman, Sachs & Co....................
J.P. Morgan Securities Inc. ...........
PaineWebber Incorporated...............
- ------------------------............... ------------
Total $50,000,000
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Debentures offered
hereby, if any are taken.
The Underwriters propose to offer the Debentures in part directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus Supplement and in part to certain securities dealers at such
price less a concession of ___% of the principal amount. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of ___% of the
principal amount to certain brokers and dealers. After the Debentures are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
Inacom has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus Supplement to purchase up to an aggregate of
$7,500,000 additional principal amount of the Debentures solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof which the principal amount
of Debentures to be purchased by each of them, as shown in the foregoing table,
bears to the Debentures offered hereby.
Inacom and its directors and executive officers have agreed during the
period beginning from the date of this Prospectus Supplement and continuing to
and including the date 90 days after the date of this Prospectus Supplement, not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities of Inacom that are substantially similar to the shares
of the Common Stock, or any other security convertible into or exchangeable for,
or that represent the right to receive, shares of Common Stock or any such
similar securities, except for (i) shares of Common Stock issuable pursuant to
convertible debt securities, warrants and stock options outstanding on the date
of this Prospectus Supplement, (ii) shares of Common Stock (or securities
convertible or exchangeable in to Common Stock) to be issued solely in
connection with acquisitions, (iii) the shares of Common Stock offered in the
concurrent offering of Common Stock and (iv) the Debentures offered hereby
without the prior written consent of the Underwriters. The Company has agreed to
give Goldman, Sachs & Co. prompt notice of any issuance of Common Stock in
private placements in connection with acquisitions and not to register such
Common Stock for sale or resale during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement.
In connection with this offering, the Underwriters may purchase and
sell Debentures or Common Stock in the open market. These transactions may
include over-allotment and stabilizing transactions and purchases to cover
syndicate short positions in connection with this offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Debentures; and syndicate
short positions involve the sale by the Underwriters of a greater number of
Debentures than they are required to purchase from the Company in this offering.
The Underwriters also may impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the
Debentures sold in this offering for their account, may be reclaimed by the
syndicate if such Debentures are repurchased by the syndicate in stabilizing or
covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Debentures, which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the NYSE or otherwise.
Inacom has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-1
No person has been authorized to give any information or
to make any representations other than those contained in
this Prospectus, and, if given or made, such information
or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any securities
other than the Securities to which it relates, or an offer to
sell or the solicitation of an offer to buy such Securities,
in any circumstance in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances,
create any implication that there has been no change in
the affairs of the Company since the date hereof or that
the information contained herein is correct as of any time
subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
Page
Prospectus Supplement
Prospectus Summary............................ S-3
Risk Factors.................................. S-6
Use of Proceeds............................... S-9
Price Range of Company Stock
and Dividend Policy......................... S-10
Capitalization................................ S-11
Selected Consolidated Financial Data.......... S-12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................... S-13
Business.. S-21
Management.................................... S-28
Description of Debentures..................... S-33
Certain Federal Income Tax Consequences....... S-37
Legal Matters................................. S-40
Experts....................................... S-40
Index to Consolidated Financial
Statements and Financial Statement
Schedule.................................... F-1
Underwriting.................................. U-1
Prospectus
Available Information......................... 2
Incorporation of Certain
Documents By Reference....................... 3
The Company................................... 4
Use of Proceeds............................... 5
Ratios of Earnings to Fixed Charges........... 6
Description of Debt Securities................ 7
Description of Capital Stock.................. 12
Plan of Distribution.......................... 15
Legal Matters................................. 16
Experts....................................... 16
$50,000,000
InaCom Corp.
_____% CONVERTIBLE
SUBORDINATED DEBENTURES
DUE ____ 2004
--------------
PROSPECTUS
___________, 1997
-------------
Goldman, Sachs & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
----------------------------------------------------------
----------------------------------------------------------
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _____________ 1997
3,000,000 SHARES
InaCom Corp.
COMMON STOCK
(par value $.10 per share)
--------------------
All of the shares of Common Stock offered hereby are being offered by
InaCom Corp.
Concurrently with this offering, the Company is offering its ___%
Convertible Subordinated Debentures due __________, 2004 in the aggregate amount
of $50,000,000 under a separate Debenture Prospectus. Neither offering is
conditioned upon consummation of the other offering. See "Debentures Offering".
SEE "RISK FACTORS" ON PAGES S-6 TO S-9 OF THIS PROSPECTUS SUPPLEMENT FOR
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ICO." On September 26, 1997, the last reported sales price of the Common Stock
on the New York Stock Exchange was $37.25 per share. See "Price Range of Common
Stock."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
Initial Public Underwriting Proceeds To
Offering Price Discount(1) Company(2)
Per Share.......................... $ $ $
Total(3)........................... $ $ $
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting."
(2) Before deduction of expenses estimated at $165,000 payable by the Company.
(3) The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 450,000 additional shares of Common
Stock at the initial public offering price per share, less the underwriting
discount. If such option is exercised in full, the total initial public offering
price, underwriting discount and proceeds to Inacom will be $ _________,
$__________ and $__________, respectively. See "Underwriting."
------------------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that certificates
for the shares will be ready for delivery in book-entry form only through the
facilities of the Depository Trust Company in New York, New York, on or about
__________, 1997, against payment therefor in immediately available funds.
Goldman, Sachs & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
------------------------
The date of this Prospectus Supplement is ___________, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
Photo collage of five photos in arrow shapes pointing clockwise at the adjacent
photo.
Caption: Needs Assessment and Technology Planning
Photo of two men and one woman discussing a company's information technology
needs.
Caption: Technology Procurement and Configuration
Photo of two technicians configuring computers at Inacom's Ontario, California
production facility.
Caption: Systems Integration and Systems Management
Photo of a technician working at a client company's technology nerve center.
Caption: Ongoing Systems Support and Distributed Support
Photo of a technician at Inacom's new Technology Services Center in Omaha,
Nebraska assisting a technology client.
Caption: Asset Management
Photo of a bar code and tracking system used to manage technology assets.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING
TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN
CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
================================================================================
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the
more detailed information and Consolidated Financial Statements, including the
Notes thereto, appearing elsewhere in this Prospectus Supplement and Prospectus
or incorporated by reference. Except as otherwise indicated herein, all
information in this Prospectus Supplement and Prospectus assumes no exercise of
the Underwriters' over-allotment option.
The Company
InaCom Corp. (the "Company" or "Inacom") is a leading single source
provider of information technology products and technology management services
designed to enhance the productivity of information systems primarily for
Fortune 1000 clients. The Company offers a comprehensive range of value added
services to manage the entire information system life cycle including: (1) needs
assessment and technology planning, (2) technology procurement and
configuration, (3) systems integration and systems management, (4) ongoing
systems support and distributed support, and (5) asset management. Inacom's
expertise includes the integration of voice and data communications. Inacom
sells its products and services through a marketing network of 51 Company-owned
business centers throughout the United States that focus on serving large
corporations. The Company also has a network of approximately 1,000 value added
resellers that typically have a regional, industry, or specific product focus.
The Company has international affiliations in Europe, Asia, Central and South
America, the Caribbean, Middle East, Africa, Canada and Mexico to satisfy the
technology management needs of its multinational clients. Inacom is the largest
purchaser of IBM computer products and believes it is the second largest
purchaser of Compaq computer products worldwide.
Inacom's expertise in procurement, configuration and delivery of PC's,
peripherals and software from a wide range of major vendors enables the Company
to customize information systems to meet specific client needs. In addition,
Inacom provides its clients with numerous benefits including in-depth product
knowledge and experience, competitive pricing from its purchasing arrangements
and a wide array of services supporting client needs on an on-going basis.
Management believes that the Company's expertise in procuring,
configuring and delivering information technology products and providing
technology management services provides a strategic advantage in addressing
certain industry trends. In particular, businesses increasingly are seeking to
outsource the management and support of their information technology systems
with fewer providers. At the same time, the demand for cost-effective,
customized technology systems has led a number of manufacturers, including IBM,
Compaq and Hewlett-Packard, to move from "build-to-forecast" delivery systems to
"build-to-order" programs in which they ship computer components to a limited
number of qualified technology providers, including Inacom, for final assembly
and configuration. Management also believes that these trends will lead to
further consolidation in the highly fragmented technology management services
industry. As a result of the Company's experience in integrating acquired
businesses, management believes that the Company is well-positioned to take
advantage of strategic acquisition opportunities as they arise.
Inacom's earnings growth has been enhanced by its rapidly expanding
services business. In the first six months of fiscal 1997, computer services
provided 47.7% of net earnings, more than double the net earnings from the same
period in 1996. Computer products contributed 40.8% and communications products
and services provided 11.5% of net earnings in the same period. Inacom expects
that earnings from services will continue to grow more rapidly than earnings
from its other business segments given Inacom's broad offering of services to
its clients and the industry trends discussed above.
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals, Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are: (i) to leverage client
relationships to continue expanding higher-margin services revenues, (ii) to
capitalize on the trend toward build-to-order/configure-to-order systems, (iii)
to expand offerings and geographic coverage through strategic acquisitions, and
(iv) to capitalize on the convergence of data and voice communications.
S-3
================================================================================
The Offering
Common Stock, $.10 par value
(the "Common Stock")........... 3,000,000 shares
Common Stock Outstanding
after the Offering............. 14,566,707 shares(1)
Use of Proceeds................ To repay, in part, indebtedness and for
general corporate purposes. See "Use of
Proceeds."
Trading Symbol................. The Common Stock is traded on the New
York Stock Exchange ("NYSE") under the
symbol "ICO".
(1) Does not include (i) 1,132,948 additional shares reserved for issuance
pursuant to currently outstanding options under the Company's 1997, 1994 and
1990 stock plans and 1987 nonqualified stock option plan, (ii) 2,302,084
additional shares reserved for issuance pursuant to the conversion of the
Company's 6% Convertible Subordinated Debentures due June 15, 2006 or (iii)
such additional shares which will be reserved for issuance pursuant to the
conversion of the Company's ___% Convertible Subordinated Debentures due
_________, 2004 which the Company is offering concurrently with this
offering of Common Stock.
================================================================================
S-4
================================================================================
Summary Consolidated Financial Data
(in thousands, except per share data)
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------ ------ ------ ------ -----
Statement of Operations Data:
Revenues..................... $ 1,014,466 $ 1,545,227 $ 1,800,539 $ 2,200,344 $3,102,055 $ 1,411,941 $ 1,813,904
Earnings (loss) before income taxes 17,959 19,693 (3,749) 19,833 31,719 12,566 20,262
Net earnings (loss).......... 10,734 11,975 (2,256) 11,707 18,733 7,414 11,954
Earnings (loss) per share, $ 1.25 $ 1.26 $ (0.22) $ 1.14 $ 1.64 $ 0.71 $ 0.94
fully diluted
Weighted average shares outstanding, 8,566 9,500 10,300 10,300 12,000 10,500 13,800
fully diluted................
Balance Sheet Data: June 28, 1997
As As Adjusted
Actual Adjusted(1) Pro Forma(2)
Working capital........................................................................ $ 81,869 $ 187,473 $ 235,723
Total assets........................................................................... 944,912 944,912 980,516
Long-term debt......................................................................... 55,250 55,250 105,250
Stockholders' equity................................................................... 207,012 312,616 312,616
(1) As adjusted to give effect to the sale of Common Stock offered hereby.
(2) As adjusted to give effect to the sale of Common Stock offered hereby and
the sale of the debentures, as described in the following paragraph, and the
application of the estimated net proceeds of both offerings. See "Use of
Proceeds".
Debenture Offering
Concurrently with the offering, the Company is offering, by separate
prospectus, $50,000,000 of its ___% Convertible Subordinated Debentures due
________, 2004 (the "Debentures") (up to $57,500,000 of Debentures if the
underwriters' over-allotment option is exercised in full). The consummation of
the offering of the Common Stock made hereby is not conditioned upon the
consummation of the Debentures offering.
================================================================================
S-5
RISK FACTORS
The Prospectus and this Prospectus Supplement, including documents
incorporated by reference herein, contain certain forward-looking statements and
information relating to the Company that are based on the beliefs of the
Company's management as well as assumptions made by and information currently
available to the Company's management. Such statements reflect the current view
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including factors described in "Risk Factors"
herein and in documents incorporated herein by reference. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
believed, estimated or expected.
Dependence Upon Key Vendors
Inacom's business is dependent in large measure upon its relationship
with key vendors. A substantial portion of Inacom's computer products revenue is
derived from the sales of the products of key vendors, including Compaq, IBM and
Hewlett-Packard. During the fiscal year ended December 28, 1996, sales of
Compaq, IBM and Hewlett-Packard products accounted for approximately 26%, 24%
and 15%, respectively, of the Company's revenues. Inacom derives a substantial
portion of its communications products and services revenue from the sale of
Lucent Technologies products and AT&T services. Although Inacom considers its
relationships with its key vendors to be good, there can be no assurance that
these relationships will continue as presently in effect or that changes in
marketing approach by one or more such key vendors and other suppliers would not
adversely affect Inacom. Inacom's agreements with these vendors are on a
non-exclusive basis and may be terminated by the vendors on notice typically
ranging from 30 to 90 days. Termination of, or a material change to, or a
nonrenewal of Inacom's agreements with Compaq, IBM and Hewlett-Packard, a
material decrease in the level of marketing development programs offered by
computer vendors, or an insufficient or interrupted supply of vendors' product
would have a material adverse effect on Inacom's business. See "Business --
Products and Vendors."
Impact of Vendor Incentive Funds
The key vendors of Inacom provide various incentives for promoting and
marketing their product offerings. Funds or credits received by Inacom are based
either on the sales of the vendor's products through the independent reseller
and Inacom-owned channels, or on Inacom's purchases from the respective vendor.
The three major forms of vendor incentives received by Inacom are co-operative
funds, market development funds and vendor rebates. The funds or credits are
earned through performance of specific marketing programs or upon completion of
objectives outlined by the vendors. These funds or credits from Inacom's primary
vendors typically range from 1% to 5% of purchases by Inacom. A material
decrease in the level of vendor incentive funding or credits would have a
material adverse effect on Inacom's business. See "Business -- Products and
Vendors."
Inventory Management Risks
The personal computer industry is characterized by rapid product
improvement and technological change resulting in relatively short product life
cycles and rapid product obsolescence, which can place inventory at considerable
valuation risk. Inacom's information technology suppliers generally provide
price protection intended to reduce the risk of inventory devaluation. However,
many of these suppliers have announced plans to reduce the number of days for
which they will provide price protection. There can be no assurance that vendors
will continue such policies or that unforeseen new product developments and
related inventory obsolescence will not materially adversely affect Inacom's
business.
S-6
Build-to-Order Delivery Model
The system used by major manufacturers, such as IBM, Compaq and
Hewlett-Packard to deliver computer systems to business clients through
technology providers such as Inacom is changing from a build-to-forecast model
to a build-to-order model. See "Business - Industry". The potential advantages
to technology providers such as Inacom from such a system -- reduced inventory
requirements, improved margins and market share gains -- involve potential
disadvantages including a decrease in the number of days of price protection
available from the manufacturers and the requirement that Inacom meet strict
manufacturer final assembly qualification standards. The failure of Inacom to
meet the manufacturer qualification standards, or the inability of Inacom to
manage its inventory to levels to meet client demands and within the
manufacturer's price protection limits, could have a material adverse effect on
Inacom's business.
Dependence Upon Key Management and Technical Personnel
Inacom's success depends to a significant extent on its ability to
attract and retain key personnel. Inacom is particularly dependent on its senior
management team and technical personnel. Inacom's strategy for growth in the
sale of computer services and communication services depends on its ability to
attract and retain qualified technical personnel, including systems engineers
and communications specialists. Competition for technical personnel is intense
and no assurance can be given that Inacom will be able to recruit and retain
such personnel. The failure to recruit and retain senior management and
technical personnel could have a material adverse effect on Inacom's business.
Management of Expanding Operations and Increased Service Focus
The Company's growth resulting from expanding operations and its
increased focus on the complete life cycle technological needs of its business
clients places significant demands on the Company's management, operational and
technical resources. Such growth and increased life cycle service focus are
expected to continue to challenge the Company's sales, marketing, technical and
support personnel and senior management. The Company's future performance will
depend in part on its ability to manage expanding operations and to adapt its
operational systems to respond to changes in its business. In particular, the
Company's success will depend upon its key management and technical personnel.
See "Dependence Upon Key Management and Technical Personnel" above. The failure
of the Company to effectively manage its growth and increased life cycle service
focus effectively or to train its technical field personnel could have a
material adverse effect on Inacom's business.
Funding Requirements; Interest Rate Sensitivity
Inacom's business requires significant working capital to finance
product inventory and accounts receivable. Inacom has funded its inventory and
working capital requirements through an inventory and working capital financing
agreement, a revolving credit facility and the public sale of debentures. The
borrowings under these agreements typically bear a floating rate of interest.
Due to the Company's significant working capital needs, an increase in interest
rates could have a material adverse effect on Inacom's results of operation.
There can be no assurance that sufficient equity or debt financing will be
available on terms acceptable to Inacom or that Inacom will be able to refinance
its existing indebtedness. The inability of Inacom to refinance its existing
indebtedness or to obtain a sufficient amount of alternative financing would
have a material adverse effect on Inacom's business.
Risks of Financial Leverage
The Company's business requires significant working capital and the
primary sources of such working capital are provided through an inventory and
working capital financing agreement, the $55.25 million in aggregate principal
amount of 6% convertible subordinated debentures issued in June 1996, and a
revolving credit facility of $40.0 million. On June 28, 1997, $80.0 million was
outstanding under the working capital portion of the inventory and working
capital financing agreement and the interest rate was 7.5% based on three-month
LIBOR. The inventory and working capital agreement expires in June 1998. The
debentures are unsecured subordinated debt
S-7
of the Company. On June 28, 1997, $40.0 million was outstanding under the
revolving credit facility and the interest rate was 6.99% based on three-month
LIBOR. The revolving credit facility expires in February 1998. The degree to
which the Company is leveraged could have important consequences to holders of
the Common Stock, including the following: (i) the Company's ability to obtain
other financing in the future may be impaired; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of
principal and interest on its indebtedness; and (iii) a high degree of leverage
may make the Company more vulnerable to economic downturns and may limit the
ability to withstand competitive pressures. The Company's ability to make
scheduled payments on or, to the extent not restricted pursuant to the terms
thereof, to refinance its indebtedness depends on its financial and operating
performance, which is subject to prevailing economic conditions and to
financial, business and other factors beyond its control.
Competition
All aspects of the technology management services industry are highly
competitive. The technology management services industry continues to experience
a significant amount of consolidation. In the future Inacom may face fewer but
larger and better financed competitors as a consequence of such consolidation.
Inacom competes for potential clients, including national accounts, with
numerous resellers, distributors and service providers. Several computer
manufacturers have expanded their channels of delivery, pricing and product
positioning and compete with Inacom's marketing network for potential clients.
Other competitors operate mail-order or discount stores offering clones of major
vendor products. Inacom also competes with computer technology providers in the
recruitment and retention of franchisees and independently-owned resellers.
Inacom competes in the computer services division with a large number of service
providers, including IBM through its Global Services division, Andersen
Consulting, EDS, CompuCom Systems, ENTEX, GE Capital Technology Management
Services, IKON Office Solutions and Vanstar Corp. Competition in the
communications products and services industry is also intense, and includes
entities which are also significant vendors of Inacom, such as Lucent
Technologies and AT&T. Certain competitors and manufacturers are substantially
larger than Inacom and have greater financial, technical, service and marketing
resources. The level of future sales and earnings achieved by Inacom in any
period may be adversely affected by a number of competitive factors, including
an increase in direct sales by vendors to independent resellers and/or clients
and increased computer client preference for mail-order or discount store
purchases of clones of major vendor products.
Acquisitions
Inacom's strategy includes effecting acquisitions and strategic
relationships in selected geographic market and service areas. Acquisitions
involve a number of special risks, including the incorporation of acquired
products and services into Inacom's offerings, the potential loss of key
employees of the acquired business, the valuation of the acquired business, the
incurrence of additional debt and the financial impact of goodwill amortization.
Inacom expects to issue equity securities to consummate certain acquisitions,
which may cause dilution to current stockholders. No assurance can be given that
Inacom will have adequate resources to consummate acquisitions, integrate the
acquired businesses or that any such acquisitions will be successful in
enhancing Inacom's business.
Dependence on Information Systems
The Company depends on a variety of information systems to provide it
with a competitive advantage. Although the Company has not in the past
experienced significant failures or down time of its proprietary procurement and
delivery system or any of its other information systems, any such failure or
significant down time could prevent the Company from taking orders and/or
shipping product and could prevent clients from accessing price and product
availability information from the Company. In such event, the Company could be
at a severe disadvantage in determining appropriate product pricing or the
adequacy of inventory levels or in reacting to rapidly changing market
conditions. A failure of the Company's information systems which impacts any of
these functions could have a material adverse effect on the Company's business.
In addition, the inability of the Company to attract and retain the
highly-skilled personnel required to implement, maintain, and operate its
centralized information
S-8
processing system and the Company's other information systems could have a
material adverse effect on the Company's business.
Gross Margin Risks
Gross margins from the sale of computer products have declined over the
past several years as a result of computer product price reductions and intense
competition. Inacom has responded by reducing operating expenses as a percentage
of revenue and by focusing on sales of higher-margin computer services and
communication services. There can be no assurance that gross margins for
computer products will not continue to decline or that Inacom will be successful
in reducing operating expenses as a percentage of revenue. Furthermore, there
can be no assurance that gross margins for computer services and communications
services will not also decline or that Inacom will be able to continue to
successfully grow and compete in such service markets.
Certain Anti-Takeover Effects
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may be deemed to have anti-takeover effects. The Company's
Certificate of Incorporation provides that the Board of Directors may issue
additional shares of Common Stock or establish one or more classes or a series
of Preferred Stock with such designations, relative voting rights, dividend
rights, liquidation and other rights that the Board of Directors fixes without
stockholder approval. In addition, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law which
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
See "Description of Capital -- Preferred Stock" and "Description of Capital
Stock -- Section 203 of the Delaware General Corporation Law" in the Prospectus.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock
(assuming an offering price of $37.25 per share, the last reported share price
of the Common Stock on the NYSE on September 26, 1997) and the Debentures being
offered concurrently are expected to be $105,604,000 and $48,250,000,
respectively ($121,444,000 and $55,488,000, respectively if the Underwriters'
over-allotment options for the offerings are exercised in full), after deducting
the discounts and commissions and the estimated offering expenses payable by the
Company. The Company currently anticipates that approximately $120,000,000 of
such net proceeds will be used to repay, in part, borrowings under the Company's
short-term revolving lines of credit which borrowings are made for working
capital purposes and can be reborrowed at any time. The reduction in short-term
borrowings will strengthen the Company's balance sheet and provide the Company
with additional debt capacity to grow its business internally and through
acquisitions. Borrowings outstanding under such lines of credit were $80 million
and $40 million at June 28, 1997 and the annual interest rate was 7.5% and
6.99%, respectively. The balance of the net proceeds will be used for general
corporate purposes. See "Capitalization."
S-9
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Prior to September 12, 1997, the Common Stock traded in the
over-the-counter market and was quoted on the NASDAQ National Market under the
symbol "INAC". The Common Stock commenced trading on the NYSE on September 12,
1997, under the symbol "ICO." The following table sets forth the quarterly high
and low sales prices for the Common Stock as reported by the NASDAQ prior to
September 12, 1997 and by the NYSE thereafter.
High Low
---------- -----------
Fiscal Year Ended December 30, 1995
First Quarter........................ $ 9.38 $ 7.00
Second Quarter....................... 14.25 8.25
Third Quarter........................ 15.25 12.25
Fourth Quarter....................... 15.12 9.50
Fiscal Year Ended December 28, 1996
First Quarter........................ $ 18.50 $ 13.25
Second Quarter ...................... 24.25 15.38
Third Quarter........................ 35.88 15.38
Fourth Quarter....................... 39.25 29.50
Fiscal Year Ending December 27, 1997
First Quarter........................ $ 40.63 $ 20.63
Second Quarter....................... 32.88 20.00
Third Quarter........................ 37.63 29.75
Fourth Quarter
(through October __, 1997)......... [--] [--]
On September, 26, 1997 the last reported sales price of the Common
Stock on the NYSE was $37.25. As of August 1, 1997 the Company estimates that
there were approximately 5,300 beneficial holders of the Company's Common Stock.
The Company has never declared or paid a cash dividend to stockholders.
The Company's Board of Directors presently intends to retain all earnings to
finance the expansion of the Company's operations and does not expect to
authorize cash dividends in the foreseeable future. Any payment of cash
dividends in the future will depend upon the Company's earnings, capital
requirements and other factors considered relevant by the Company's Board of
Directors. Certain of the Company's debt agreements restrict the amount of
dividends which may be paid by the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Liquidity and
Capital Resources."
S-10
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 28, 1997, and as adjusted to give effect to the application of estimated
net proceeds of $105,604,000 from the sale by the Company of the Common Stock
and $48,250,000 from the sale by the Company of the Debentures. The information
set forth below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
June 28, 1997
As Adjusted
Actual As Adjusted(1) Pro Forma(2)
(in thousands)
Cash and cash equivalent.................................. $ 30,720 $ 30,720 $ 64,574
============== ============ ============
Short-term debt........................................... $ 120,000 $ 14,396 ---
============== ============ ============
Long-term debt............................................ $ 55,250 $ 55,250 $ 105,250
Stockholders' equity:
Capital stock:
Class A preferred stock, $1 par value;
authorized 1,000,000 shares; none issued........... -- -- --
Common stock, $.10 par value; authorized
30,000,000 shares; 11,537,315 shares
issued and outstanding; 14,537,315 shares issued
and outstanding as adjusted(3)..................... 1,153 1,453 1,453
Additional paid-in capital............................ 116,298 221,602 221,602
Retained earnings..................................... 89,561 89,561 89,561
-------------- ------------ ------------
Total stockholders' equity......................... 207,012 312,616 312,616
-------------- ------------ ------------
Total capitalization............................ $ 262,262 $ 367,866 $ 417,866
============== ============ ============
(1) As adjusted to give effect to the sale of the Common Stock offered hereby.
(2) Assumes consummation of the offering of the Debentures concurrently with the
consummation of the offering of Common Stock.
(3) Does not include (i) 1,132,948 additional shares reserved for issuance
pursuant to currently outstanding options under the Company's 1997, 1994 and
1990 stock plans and 1987 nonqualified stock option plan, (ii) 2,302,084
additional shares reserved for issuance pursuant to the conversion of the
Company's 6% Convertible Subordinated Debentures due June 15, 2006 or (iii) such
additional shares which will be reserved for issuance pursuant to the conversion
of the Company's ____% Convertible Subordinated Debentures due _____________,
2004 which the Company is offering concurrently with this offering of Common
Stock.
S-11
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data under the captions "Statement
of Operations Data" and "Balance Sheet Data" are derived from the Company's
Annual Reports on Form 10-K for each of the years ended December 26, 1992,
December 25, 1993, December 31, 1994, December 30, 1995 and December 28, 1996
which have been audited by KPMG Peat Marwick LLP, independent public
accountants, and such data as of and for the twenty-six weeks ended June 29,
1996 and June 28, 1997 have been derived from the Company's unaudited Quarterly
Reports on Form 10-Q. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto, and the independent
auditors' report and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Selected Consolidated Financial Data
(in thousands, except per share data)
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
--------------------------------------------------------------------------------
Statement of Operations Data:
Revenues...................... $1,014,466 $1,545,227 $1,800,539 $2,200,344 $3,102,055 $1,411,941 $1,813,904
Direct costs.................. 895,276 1,375,796 1,631,820 1,996,538 2,818,696 1,286,627 1,631,787
---------- --------- ---------- ---------- ---------- ---------- ----------
Gross margin.................. 119,190 169,431 168,719 203,806 283,359 125,314 182,117
Selling, general and
administrative expenses..... 93,267 141,142 160,437 169,338 231,235 102,829 147,671
---------- --------- --------- --------- ---------- ---------- ----------
Operating income.............. 25,923 28,289 8,282 34,468 52,124 22,485 34,446
Interest expense.............. 7,964 8,596 12,031 14,635 20,405 9,919 14,184
---------- --------- --------- --------- ---------- -------- ---------
Earnings (loss) before income
taxes....................... 17,959 19,693 (3,749) 19,833 31,719 12,566 20,262
Income tax expense (benefit).. 7,225 7,947 (1,493) 8,126 12,986 5,152 8,308
Cumulative effect of change in
accounting for taxes........ -- 229 -- -- -- -- --
--------- --------- -------- --------- --------- -------- ---------
Net earnings (loss)........... $ 10,734 $ 11,975 $ (2,256) $ 11,707 $ 18,733 $ 7,414 $ 11,954
========= ========= ========= ========= ========= ======== =========
Earnings (loss) per share,
fully diluted............... $ 1.25 $ 1.26 $ (0.22) $ 1.14 $ 1.64 $ .71 $ .94
========= ========= ========== ========= ========= ======== =========
Weighted average shares
outstanding, fully diluted.. 8,566 9,500 10,300 10,300 12,000 10,500 13,800
========= ========= ========== ========= ========= ======== =========
Balance Sheet Data:
Working capital............... $ 65,901 $ 67,936 $ 78,759 $ 90,940 $ 100,303 $135,408 $ 81,869
Total assets.................. 288,365 456,894 519,875 624,238 847,600 631,854 944,912
Long-term debt................ 36,800 20,000 30,333 23,667 55,250 68,850 55,250
Stockholders' equity.......... $ 101,275 $ 136,491 $ 135,590 $ 148,775 $ 176,830 $158,313 $ 207,012
Certain Data As A Percentage of Revenues
Fiscal Year Ended December Twenty-Six Weeks Ended
June 29, June 28,
1992 1993 1994 1995 1996 1996 1997
------ ------ ------- ------ ------- ------ ------
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs....................... 88.3 89.0 90.6 90.7 90.8 91.1 90.0
------ ------ ------- ------ ------- ------ ------
Gross margin....................... 11.7 11.0 9.4 9.3 9.2 8.9 10.0
Selling, general and administrative
expenses 9.2 9.1 8.9 7.7 7.5 7.3 8.1
------ ------ ------- ------ ------- ------ ------
Operating income................... 2.5 1.9 0.5 1.6 1.7 1.6 1.9
Interest expense................... 0.8 0.6 0.7 0.7 0.7 0.7 0.8
------ ------ ------- ------ ------- ------ ------
Earnings (loss) before income tax.. 1.7 1.3 (0.2) 0.9 1.0 0.9 1.1
Income tax expense (benefit)....... 0.7 0.5 (0.1) 0.4 0.4 0.4 0.4
------ ------ ------- ------ ------- ------ ------
Net earnings (loss)................ 1.0% 0.8% (0.1)% 0.5% 0.6% 0.5% 0.7%
====== ====== ======= ====== ======= ====== ======
S-12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Inacom is a leading single source provider of information technology
products and technology management services designed to enhance the productivity
of information systems, primarily for Fortune 1000 clients. The Company offers a
comprehensive range of value added services to manage the entire information
system life cycle including: (1) needs assessment and technology planning, (2)
technology procurement and configuration, (3) systems integration and systems
management, (4) ongoing systems support and distributed support, and (5) asset
management.
The Company generates revenue, gross margin and earnings by providing
products and services to its clients throughout the life cycle of a computer
system. These revenues, gross margin and earnings are comprised of three main
classifications; (i) computer product sales, (ii) computer services and (iii)
communication products and services and are provided through the Company's
marketing network which consists of Company-owned business centers and
independent value added resellers. Computer product sales are derived from the
sale of microcomputer systems, workstations and related products. Computer
services are derived from the sale of technology procurement services, system
integration services and system support services. Communication products and
services are derived from the sale of voice and data equipment, long distance
services and convergence technology through the Company's communications
division.
The Company recognizes revenue from computer product sales upon
shipment to its clients. Revenues from consulting and other computer services
are recognized as the Company performs the services. Revenues from maintenance
and extended warranty agreements are recognized ratably over the term of the
agreement. Extended warranty costs are accounted for on an accrual basis and are
recognized under the sales method.
Results of Operations
The following table sets forth, for the indicated periods, revenues,
gross margins and net earnings of the Company segmented by the three main
classifications.
Summary of Operating Results
(in thousands)
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28, June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Revenues:
Computer products....... $1,680,397 $2,047,215 $2,885,019 $1,316,307 $1,657,705 $ 718,585 $ 884,952
Computer services....... 85,406 95,476 136,888 58,340 108,238 30,201 60,607
Communication products
and services.......... 34,736 57,653 80,148 37,294 47,961 21,074 26,655
---------- ---------- ---------- ---------- --------- ---------- ---------
Total......... $1,800,539 $2,200,344 $3,102,055 $1,411,941 $1,813,904 $ 769,860 $ 972,214
========== ========== ========== ========== ========== ========== =========
Gross margin:
Computer products....... $ 113,797 $ 122,386 $ 162,651 $ 74,316 $ 92,080 $ 40,825 $ 48,076
Computer services....... 52,506 67,599 103,228 42,790 79,858 22,854 45,726
Communication products
and services.......... 7,516 13,821 17,480 8,208 10,179 4,454 5,072
---------- ---------- ---------- ---------- --------- ---------- ---------
Total......... $ 173,819 $ 203,806 $ 283,359 $ 125,314 $ 182,117 $ 68,133 $ 98,874
========== ========== ========== ========== ========== ========== =========
Net earnings (loss):
Computer products....... $ (659) $ 5,418 $ 9,703 $ 4,102 $ 4,883 $ 2,545 $ 2,550
Computer services....... 2,527 5,272 7,381 2,796 5,691 1,669 3,464
Communication products
and services.......... 77 1,017 1,649 516 1,380 210 695
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total......... $ 1,945 $ 11,707 $ 18,733 $ 7,414 $ 11,954 $ 4,424 $ 6,709
========== ========== ========== ========== ========== ========== =========
S-13
(1) Gross margin and net earnings exclude the impact of non-recurring charges
recognized in the second quarter of 1994. (2) Net earnings include the impact of
non-recurring charges of $991,000 in the fourth quarter of 1996.
The following table sets forth, for the indicated periods, the
percentage mix of revenue and net earnings of the Company by the three main
classifications.
Percentage Mix of Revenues and Net Earnings
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28 June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Revenues:
Computer products....... 93.3% 93.1% 93.0% 93.3% 91.4% 93.4% 91.1%
Computer services....... 4.7 4.3 4.4 4.1 6.0 3.9 6.2
Communication products
and services.......... 2.0 2.6 2.6 2.6 2.6 2.7 2.7
------- ------- ------- -------- -------- -------- -----
Total......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ======== ======== =====
Net earnings:
Computer products....... (33.9)% 46.3% 51.8% 55.3% 40.8% 57.5% 38.0%
Computer services....... 129.9 45.0 39.4 37.7 47.7 37.7 51.6
Communication products
and services.......... 4.0 8.7 8.8 7.0 11.5 4.8 10.4
------- ------- ------- -------- -------- -------- -----
Total......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ======== ======== =====
The following table sets forth, for the indicated periods, the gross margin
percentage of the three main classifications and the consolidated gross margin
percentage.
Gross Margin Percentages
Fiscal Year Ended December Twenty-Six Weeks Ended Thirteen Weeks Ended
June 29, June 28 June 29, June 28,
1994(1) 1995 1996(2) 1996 1997 1996 1997
------- ---- ------- ---- ---- ---- ----
Gross margin:
Computer products....... 6.8% 6.0% 5.6% 5.7% 5.6% 5.7% 5.4%
Computer services....... 61.5 70.8 75.4 73.4 73.8 75.7 75.5
Communication products
and services.......... 21.6 24.0 21.8 22.0 21.2 21.1 19.0
Consolidated gross margin.. 9.7 9.3 9.1 8.9 10.0 8.9 10.2
(1) Gross margin and net earnings exclude the impact of non-recurring charges
recognized in the second quarter of 1994.
(2) Net earnings include the impact of non-recurring charges of $991,000 in the fourth quarter of 1996.
Second Quarter and First Six Months of 1997 Compared to
Second Quarter and First Six Months of 1996
Revenues. Revenues for the second quarter and first six months of 1997
increased $202.4 million or 26.3% and $402.0 million or 28.5% over the second
quarter and first six months of 1996, respectively. Revenue growth resulted
primarily from computer product sales which increased $166.4 million or 23.2%
and $341.4 million or 25.9% over the second quarter and first six months of
1996, respectively. Revenues from computer services increased $30.4 million or
100.7% and $49.9 million or 85.5% over the second quarter and first six months
of 1996, respectively. Revenues from communication products and services
increased $5.6 million or 26.5% and $10.7 million or 28.6% over the second
quarter and first six months of 1996, respectively.
Revenues increased primarily as a result of an increase in products
shipped directly to the end-user client, overall industry growth and the
acquisitions completed by the Company during 1996 and 1997. The increase in
revenues related to the acquisitions was approximately $27.5 million and $52.3
million over the second quarter and first six months of 1996, respectively. The
increase in computer product sales resulted primarily from an increase
S-14
in sales through the Company-owned business centers ($129.1 million or 39.2% and
$222.2 million or 35.9% over the second quarter and first six months of 1996,
respectively) and through an increase in sales through the independent reseller
channel ($49.0 million or 12.0% and $136.1 million or 18.7% over the second
quarter and first six months of 1996, respectively).
Revenues from computer services increased as a result of increased
sales efforts for such service offerings, the inclusion of these services with
increasing computer product sales and the recent acquisitions completed by the
Company. The increase in computer services sales resulted primarily from an
increase in sales through the Company-owned business centers ($15.0 million or
65.4% and $24.8 million or 55.9% over the second quarter and first six months of
1996, respectively). The increase in computer services revenues related to
acquisitions was approximately $9.4 million and $13.4 million over the second
quarter and first six months of 1996, respectively. Revenues from communication
products and services increased as a result of broad based growth from the
communications product offerings.
Gross Margins. The increase in the Company's gross margin percentages
for the first six months of 1997 versus the same period in 1996 was primarily a
result of the increase in mix of higher-margin computer services and
communications products and services versus lower-margin computer products. The
decrease in gross margin percentage for computer products resulted primarily
from a decrease in the margin percentage on computer product sales through the
Company-owned business centers and the independent reseller channel in the first
six months of 1997 versus the same period in 1996. The increase in gross margin
percentage for computer services resulted from an increase in the mix of
services to include more higher-margin systems integration services versus
support and technology procurement services. The decrease in gross margin
percentage for the communication products and services resulted from an increase
in mix of revenues to include more lower-margin communications product sales as
compared to higher-margin long distance and non-product services.
Selling, General And Administrative Expenses. Selling, general and
administrative (SG&A) expenses for the second quarter and first six months of
1997 increased $24.8 million or 44.6% and $44.8 million or 43.6% over the second
quarter and first six months of 1996, respectively. SG&A as a percentage of
revenue was 8.3% in the second quarter of 1997 versus 7.2% in the second quarter
of 1996, and 8.1% for the first six months of 1997 versus 7.3% for the first six
months of 1996. The increase in spending and the related increase in SG&A as a
percentage of revenues resulted primarily from the costs of handling the
increased services revenues. During the third quarter of 1996 the Company
continued to invest in the infrastructure by opening a center in Ontario,
California to facilitate "build-to-order" and cost-effective configuration and
delivery to the Company's clients. The Company incurred additional costs during
the second quarter and first six months of 1997 related to integrating the
acquisitions completed in the fourth quarter of 1996 and acquisitions completed
in the first and second quarters of 1997. The increase in SG&A related to
acquisitions was approximately $6.1 million and $7.5 million over the second
quarter and first six months of 1996, respectively.
Interest Expense. Interest expense for the second quarter and first six
months of 1997 was $7.1 million and $14.2 million, respectively, versus interest
expense for the second quarter and first six months of 1996 of $5.0 million and
$9.9 million, respectively. Interest expense increased primarily due to higher
average daily borrowings. Average daily borrowings for the second quarter and
first six months of 1997 were $124.1 million and $118.3 million more than the
average borrowings for the second quarter and first six months of 1996,
respectively. The weighted average borrowing rate for the second quarter of 1997
increased approximately 6 basis points over the second quarter of 1996 and
decreased 15 basis points for the first six months of 1997 versus the first six
months of 1996. The increase in the average daily borrowings resulted primarily
from financing an increase in accounts receivable resulting from the increase in
revenues, and an increase in inventory levels. The weighted average daily
borrowing interest rate increased for the second quarter of 1997 primarily due
to an increase in LIBOR rates in 1997 versus 1996. The average daily borrowing
interest rate decreased for the first six months of 1997 versus the same period
in 1996 primarily because the Company sold an additional $100 million of
accounts receivable in January 1997, which as of June 28, 1997 had an interest
rate of 6.09%, and issued $55.25 million of 6% convertible subordinated
debentures in June 1996 (see "Liquidity and Capital Resources"). The funding
from the sale of $100 million in accounts receivable and the issuance of $55.25
million of convertible bonds was used to decrease the
S-15
borrowings outstanding on the inventory and working capital credit line which on
June 28, 1997 had an interest rate of 7.5%.
Net Earnings. Net earnings for the quarter ending June 28, 1997
increased 51.7% to $6.7 million compared with net earnings of $4.4 million for
the second quarter of 1996. Net earnings per share for the second quarter of
1997 increased to $.52 per fully diluted share from the $.42 per fully diluted
share reported for the same period in 1996. Net earnings for the first six
months of 1997 increased 61.2% to $12.0 million compared with net earnings of
$7.4 million for the first six months of 1996. Net earnings per share for the
first six months of 1997 increased to $.94 per fully diluted share from the $.71
per fully diluted share reported for the same period in 1996. Net earnings from
computer services for the quarter ending June 28, 1997 increased 107.5% to $3.5
million compared with net earnings from computer services of $1.7 million for
the same period in 1996 and constituted 51.6% in the aggregate of net earnings
of the Company for such period.
1996 Compared to 1995
Revenues. Revenues for 1996 increased $901.7 million or 41.0% to $3.1
billion when comparing the fiscal year ended December 28, 1996 with the fiscal
year ended December 30, 1995. Revenue growth resulted primarily from computer
product sales which increased $837.8 million or 40.9% during 1996. Revenues from
computer services increased $41.4 million or 43.4% over 1995. Revenues from
communication products and services increased $22.5 million or 39.0% in 1996.
Revenues increased primarily as a result of an increase in products
shipped directly to the end-user client, overall industry growth, the sale of
products to new independent resellers and the acquisitions completed by the
Company-owned business centers. The increase in revenues related to the
acquisitions was approximately $49.4 million for 1996. The increase in computer
product sales resulted from an increase in sales through the independent
reseller channel ($563.5 million or 50.9% over 1995) and through an increase in
sales through the Company-owned business centers ($291.7 million or 29.4% over
1995). Revenues from computer services increased as a result of increased sales
efforts for such service offerings and the inclusion of these services with
increasing computer product sales. Revenues from communication products and
services increased as a result of broad based growth from the communications
product and service offerings.
Gross Margins. The decrease in the Company's gross margin percentage
for 1996 is primarily a result of the decrease in the gross margin percentage on
computer products, which resulted primarily from a greater proportion of
lower-margin independent reseller channel sales in 1996 versus higher-margin
computer product sales in the Company-owned business centers.
The increase in gross margin percentage for computer services resulted
from an increase in the mix of services to include more higher-margin systems
integration services versus the support and technology procurement services. The
decrease in gross margin percentage for the communication products and services
resulted from an increase in mix of revenues which included more lower-margin
communications product sales as compared to the higher-margin long distance and
non-product services.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased $61.9 million or 36.6% in 1996. SG&A as
a percentage of revenue was 7.5% in 1996 versus 7.7% in 1995. Excluding the
impact of non-recurring charges recognized in the fourth quarter of 1996, SG&A
expenses increased $60.2 million or 35.6% in 1996. SG&A as a percentage of
revenue, excluding the impact of the non-recurring charges recognized in the
fourth quarter of 1996, was 7.4% in 1996 versus 7.7% in 1995.
The increase in spending resulted primarily from the costs of handling
the increased product, services and communications revenues. The Company also
continued to invest in the infrastructure by opening a center in Ontario,
California to enable "build-to-order" configuration and delivery, during the
third quarter of 1996. The Company incurred additional costs during the year
related to integrating the current year's acquisitions. The decrease in SG&A as
a percentage of revenue resulted from leverage achieved through operational
efficiencies
S-16
resulting from current and prior period investments in distribution center
automation, information systems and computer service offerings.
Interest Expense. Interest expense for 1996 increased by $5.8 million
to $20.4 million. Interest expense increased due to higher average daily
borrowings. Average daily borrowings for 1996 were $114.4 million more than the
average borrowings during 1995. The average daily borrowing interest rate
decreased approximately 0.8 percentage points from 1995. The increase in the
average daily borrowings resulted from the Company's decision in the first
quarter of 1996 to take advantage of early pay discounts offered by some of the
Company's major vendors as well as an increase in accounts receivable and
inventory. The increase in accounts receivable is a result of an increase in
sales. The decrease in the average daily borrowing interest rate resulted from
the Company selling $100 million of accounts receivable in June 1995 and the
issuance of $55.25 million of 6% convertible subordinated debentures in June
1996 (see "Liquidity and Capital Resources").
Net Earnings. Net earnings for 1996 increased 60% to $18.7 million,
which includes non-recurring charges of $991,000, compared with net earnings of
$11.7 million for 1995. Net earnings per share increased to $1.64 per fully
diluted share, which includes non-recurring charges of $0.09 per share, from the
$1.14 per fully diluted share reported for 1995.
Business Combination and Non-Recurring Charges. In December 1996, the
Company effected two business combinations accounted for as poolings of interest
transactions. The overall impact of the combinations with relation to the
financial statements taken as a whole are not material and thus prior periods
for the Company have not been restated to reflect the business combinations. The
Company recognized non-recurring charges of $991,000 related to the business
combinations during the fourth quarter of 1996. The effect of the immaterial
poolings was to increase stockholders' equity by approximately $643,000.
1995 Compared To 1994
Revenues. Computer product sales increased $366.8 million or 21.8% to
$2.0 billion during 1995. Computer services increased $10.1 million or 11.8% to
$95.5 million during 1995. Communications products and services revenue
increased $22.9 million or 66% to $57.7 million during 1995.
Revenues from computer product sales increased as a result of broad
based growth within both the independent reseller channel and the Company-owned
business centers. 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 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" pursuant to which certain manufacturers, beginning in 1994,
lessened or eliminated requirements from independent resellers to purchase
product from one source. Revenues from the Company-owned business centers
increased as a result of broad-based growth across all regional locations.
Computer services revenue increased as a result of the increase in computer
product sales. Revenues from communication products and services increased as a
result of broad-based growth within the Company's communications division.
Gross Margins. Computer product margins increased $8.6 million or 7.6%
to $122.4 million during 1995 and the gross margin percentage, exclusive of
non-recurring charges recognized in the second quarter of 1994, decreased 0.8
percentage points to 6.0% in 1995. Computer services margins increased $15.1
million or 28.7% to $67.6 million during 1995 and the gross margin percentage,
exclusive of non-recurring charges recognized in the second quarter of 1994,
increased 9.3 percentage points to 70.8% in 1995. Communications product and
services margins increased $6.3 million or 83.9% to $13.8 million during 1995
and the gross margin percentage increased 2.4 percentage points to 24.0% in
1995. Computer products margin was 60.1% of total 1995 gross margin versus 65.5%
of total 1994 gross margin. Computer services gross margin was 33.2% of total
1995 gross margin versus 30.2% of total 1994 gross margin. Communications
products and services gross margin was 6.7% of total 1995 gross margin versus
4.3% of total 1994 gross margin.
S-17
The increase in gross margin dollars for computer products was a result
of the increase in revenues. The decline in gross margin percentage for computer
products was a result of market pricing pressures related to open sourcing,
which began in the independent reseller channel during the second quarter of
1994, and an overall decline in hardware margins realized on end user sales. The
increase in gross margin dollars and gross margin percentage for computer
services resulted from the increased revenues and an increase in mix of services
revenues to include more higher margin systems integration services versus the
support and technology procurement services. The increase in gross margin
dollars and gross margin percentage for the communication products and services
was a result of the increased revenues and the increase in the mix of revenues
to include more higher margin long distance and services.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased $8.9 million or 5.6% to $169.3 million
in 1995. As a percentage of revenue, these expenses decreased 1.2 percentage
points from 8.9% in 1994 to 7.7% in 1995. Excluding the impact of 1994
non-recurring charges, SG&A expenses increased $10.9 million or 6.9% during
1995. SG&A as a percentage of revenue, excluding the impact of non-recurring
charges recognized in the second quarter of 1994, decreased 1.1 percentage
points during 1995.
The increase in SG&A during 1995 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 was
primarily a result of employee 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 1995. The
decrease in SG&A as a percentage of revenue during 1995 resulted from
operational efficiencies achieved through investments in distribution center
automation and information systems.
Interest Expense. Net interest expense for 1995 increased by $2.6
million to $14.6 million. The increase was due primarily to the increase in the
average daily borrowing interest rate. The Company's average daily borrowing
interest rate for 1995 increased approximately 1.3 percentage points during the
year while the average daily borrowings decreased to $178.8 million in 1995 from
$201.9 million in 1994.
Net Earnings. For the reasons described above, the net earnings for
1995 were $11.7 million compared to a net loss of $2.3 million in 1994 which
includes non-recurring charges of $4.2 million; an increase of $14.0 million.
Earnings per share for 1995 were $1.14 compared to a loss per share of $0.22 in
1994 which includes non-recurring charges of $.41 per share.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per share" which revises the calculation and
presentation provisions of Accounting Principals Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 28, 1997. Retroactive application will be required. The Company
believes the adoption of Statement 128 will not have a significant effect on its
reported earnings per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are provided through an
inventory and working capital financing agreement of $550.0 million (increased
from $350.0 million as of June 27, 1997), convertible subordinated debentures of
$55.25 million, and a revolving credit facility of $40.0 million.
The $550 million facility provided by IBM Credit Corp. can be used by
the Company at its discretion, subject to a borrowing base, for its working
capital needs and inventory purchases. The inventory and working capital
financing agreement was amended in 1997 and expires June 29, 1998. On June 28,
1997, $338.8 million was outstanding under the inventory and working capital
financing agreement. Of this amount, $258.8 million was related to non-interest
bearing trade accounts payable. The balance of $80.0 million was related to
working capital with an interest rate of 7.5% based on three-month LIBOR. This
inventory and working capital financing agreement is secured by inventory and
other assets.
The $55.25 million 6% convertible subordinated debentures were issued
in June 1996 and are due June 15, 2006. The debentures are convertible into
common stock of the Company at a conversion price of $24.00 per share, subject
to adjustments under certain circumstances, beginning on September 19, 1996. The
debentures are not redeemable by the Company prior to June 16, 2000 and,
thereafter, the Company may redeem the debentures at
S-18
various premiums to principal amount. The debentures may also be redeemed at the
option of the holder at any time prior to June 16, 2000 if there is a Change in
Control (as defined in the indenture) at a price equal to 100% of the principal
amount plus accrued interest at the date of redemption.
The $40.0 million revolving credit facility agreement expires in
February 1998. On June 28, 1997, $40.0 million was outstanding under the
revolving credit facility and the interest rate was 6.99% based on three-month
LIBOR. The revolving credit facility is secured by inventory and other assets.
The debt agreements contain certain restrictive covenants, including
the maintenance of minimum levels of working capital, tangible net worth,
limitations on incurring additional indebtedness and restrictions on the amount
of net loss the Company can incur. Certain covenants effectively limit the
amount of dividends which the Company may pay to the stockholders. The amount of
retained earnings on June 28, 1997 not restricted as to payments of cash
dividends under the most restrictive covenants in such agreements was
approximately $78.8 million. The Company was in compliance with the covenants
contained in the agreements on June 28, 1997.
Long-term debt was 21.1% of the total long-term debt and equity at June
28, 1997 versus 30.3% at June 29, 1996. The decrease was primarily a result of
the payment of $13.6 million of private placement notes previously held by
unaffiliated insurance companies and an increase in equity due to earnings and
the issuance of additional shares of common stock.
The Company has entered into an agreement to sell $200 million of
accounts receivable, with limited recourse, to an unrelated financial
institution. The agreement was initially entered into in June 1995 with respect
to $100 million of accounts receivable and was amended in January 1997 to sell
an additional $100 million of accounts receivable. New qualifying receivables
are sold to the financial institution as collections reduce previously sold
receivables in order to maintain a balance of $200 million sold receivables. On
June 28, 1997, $46.6 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. On June 28, 1997, the interest rate was 6.09%.
The Company occasionally uses financial instruments to reduce interest
rate risk. The Company does not hold or issue financial instruments for trading
purposes. On January 17, 1997 the Company entered into a one-year interest rate
swap agreement with an unrelated financial institution which resulted in certain
floating rate interest payment obligations becoming fixed rate interest payment
obligations at 5.82%. The notional amount of the swap agreement was $100
million.
During the first six months of 1997, the Company used $44.0 million of
cash in operations. Inventory increased by $74.1 million during the first six
months with a portion of the increase offset by an increase in accounts payable
of $68.8 million. Accounts receivable also increased $55.2 million during the
first six months of 1997. Inventory increased during the first six months of
1997 as a result of the Company taking advantage of certain major manufacturers
inventory incentive programs. Accounts payable increased as a result of the
increase in inventory levels. Accounts receivable increased during the first six
months primarily as a result of the increase in revenues for the first six
months of 1997.
The Company used $35.9 million in cash for investing activities in the
first six months of 1997. Cash of $19.8 million was used to purchase fixtures
and equipment and cash of $4.1 million was used for business combinations.
Net cash provided from financing activities for the first six months of
1997 totaled $79.2 million, of which $100.0 million was provided from the sale
of accounts receivable. The financing proceeds were used to reduce short term
borrowings of $20.8 million.
Operating activities used cash of $18.3 million in 1996 compared to
$57.7 million in 1995. The primary factor contributing to the change in cash
used by operating activities was the net cash provided by inventory and
S-19
accounts payable. In 1996, inventory increased $31.8 million over 1995 with an
offsetting increase in accounts payable of $71.1 million resulting in net cash
provided from inventory and accounts payable of $39.3 million. In 1995,
inventory increased $124.3 million over 1994 with a portion of the increase
financed through an increase in accounts payable of $105.1 million resulting in
net cash used in inventory and accounts payable of $19.2 million. The increase
in cash provided by inventory and accounts payable was primarily a result of an
increase in inventory turns in addition to the Company's efforts to match
accounts payable terms more closely with inventory turns.
The net cash provided by inventory and accounts payable was primarily
offset by an increase in accounts receivable in 1996. Accounts receivable levels
increased $123.6 million due to the increased revenues.
The Company used $61.1 million in cash for investing activities in
1996. Cash of $26.2 million was used to purchase fixtures and equipment and cash
of $23.4 million was used for business combinations (See Notes to Consolidated
Financial Statements -- Business Combinations).
Net cash provided by financing for 1996 totaled $90.1 million, of which
$63.0 million was provided from notes payable and $55.25 million was provided
from the proceeds received from the sale of 6% convertible subordinated
debentures. The financing proceeds were partially offset by $30.3 million in
payments on long-term borrowings.
The Company believes the funding expected to be generated from
operations and provided by the existing credit facilities and this offering will
be sufficient to meet working capital and capital investment needs for the next
twelve months.
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BUSINESS
Inacom is a leading single source provider of information technology
products and technology management services designed to enhance the productivity
of information systems primarily for Fortune 1000 clients. The Company offers a
comprehensive range of value added services to manage the entire information
system life cycle including: (1) needs assessment and technology planning, (2)
technology procurement and configuration, (3) systems integration and systems
management, (4) ongoing systems support and distributed support, and (5) asset
management. Inacom's expertise includes the integration of voice and data
communications. Inacom sells its products and services through a marketing
network of 51 Company-owned business centers throughout the United States that
focus on serving large corporations. The Company also has a network of
approximately 1,000 value added resellers that typically have a regional,
industry, or specific product focus. The Company has international affiliations
in Europe, Asia, Central and South America, the Caribbean, Middle East, Africa,
Canada and Mexico to satisfy the technology management needs of its
multinational clients. Inacom is the largest purchaser of IBM computer products
and believes it is the second largest purchaser of Compaq computer products
worldwide.
Inacom's expertise in procurement, configuration and delivery of PC's,
peripherals and software from a wide range of major vendors enables the Company
to customize information systems to meet specific client needs. In addition,
Inacom provides its clients with numerous benefits including in-depth product
knowledge and experience, competitive pricing from its purchasing arrangements
and a wide array of services supporting client needs on an on-going basis.
Management believes that the Company's expertise in procuring,
configuring and delivering information technology products and providing
technology management services provides a strategic advantage in addressing
certain industry trends. In particular, businesses increasingly are seeking to
outsource the management and support of their information technology systems
with fewer providers. At the same time, the demand for cost-effective,
customized technology systems has led a number of manufacturers, including IBM,
Compaq and Hewlett-Packard, to move from "build-to-forecast" delivery systems to
"build-to-order" programs in which they ship computer components to a limited
number of qualified technology providers, including Inacom, for final assembly
and configuration. Management also believes that these trends will lead to
further consolidation in the highly fragmented technology management services
industry. As a result of the Company's experience in integrating acquired
businesses, management believes that the Company is well-positioned to take
advantage of strategic acquisition opportunities as they arise.
Inacom's earnings growth has been enhanced by its rapidly expanding
services business. In the first six months of fiscal 1997, computer services
provided 47.7% of net earnings, more than double the net earnings from the same
period in 1996. Computer products contributed 40.8% and communications products
and services provided 11.5% of net earnings in the same period. Inacom expects
that earnings from services will continue to grow more rapidly than earnings
from its other business segments given Inacom's broad offering of services to
its clients and the industry trends discussed above.
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals, Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are: (i) to leverage client
relationships to continue expanding higher-margin services revenues, (ii) to
capitalize on the trend toward build-to-order/configure-to-order systems, (iii)
to expand offerings and geographic coverage through strategic acquisitions, and
(iv) to capitalize on the convergence of data and voice communications.
Industry Background
The markets for corporate information technology products and
technology management services are expected to grow at an annual rate of 18% and
15%, respectively, and are projected to reach $44.9 billion and $26.1 billion,
respectively, in 2000 according to DataQuest, a Gartner Group company, a leading
information technology research firm. In recent years, the computer industry has
undergone a significant transformation as
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personal computers have replaced traditional minicomputer and mainframe systems.
The increasing use of personal computers has led to the networking of personal
computers into local area networks (LANs), which in turn has resulted in the
expansion of shared information through wide area networks (WANs). Networks are
typically comprised of servers, personal computers, peripherals, communication
devices and software. Networks increase the speed and flexibility of
distributing information and the usefulness of such information to end-users.
Achieving the optimal technology system, however, is difficult for many
businesses due to the complexity of the distributed network environment, the
fragmented sources of products and services and the lack of trained personnel to
design, deploy and support networks.
The decision-making process that businesses face when designing,
selecting and deploying information technology solutions is becoming more costly
and complex. Many businesses increasingly seek to outsource part or all of the
management and support of their information technology systems. Businesses must
select from an expanding number of product options with shortening life cycles.
Businesses seeking to implement enterprise-wide information management solutions
often must integrate diverse and incompatible hardware and software environments
which have independently evolved within their organizations. Such integration
typically requires the design of a new network, the upgrade of existing hardware
and software, and the migration to new systems. In addition, a shortage of
qualified information technology personnel has limited the ability of many
businesses to capitalize on the latest technologies. Many businesses find it
increasingly difficult and costly to maintain the internal infrastructure needed
to support their networks. As a result of these trends, the outsourcing of
computer network management has grown substantially.
These developments have created a rapidly-growing market for managing
distributed technology. Although competition has led to reduced margins in the
computer products segment of the industry, the complexity of designing,
selecting and deploying information systems has led to an increase in demand for
related higher margins technology management services. The demand for
cost-effective customized technology systems has driven a significant change in
industry delivery methods. The historical method was a "build-to-forecast"
system, in which both manufacturers and providers of computer products
maintained inventories based on forecasted client demand. Recently, a number of
manufacturers, including IBM, Compaq and Hewlett-Packard, have announced
"build-to-order" programs in which they will ship basic computer components to a
limited number of technology providers, including Inacom, based on specific
client orders, with final assembly and configuration to be performed by the
technology providers for delivery to the business client.
Business Strategy
Inacom's goals are to grow net earnings and increase economic value
added to enhance shareholder value. To achieve these goals Inacom provides
comprehensive solutions to improve the productivity of its clients' information
systems. Key elements of the Company's strategy are as follows.
Leverage Client Relationships to Continue Expanding Higher-Margin
Services Revenues. Inacom's large client base of hardware procurement clients is
a substantial source of services revenue. As businesses increasingly seek to
outsource systems management functions to fewer providers, the Company believes
it can continue to rapidly grow its services revenue. During the first six
months of 1997, computer services accounted for approximately 48% of net
earnings, compared to 38% in the comparable period one year ago. Services
revenue is generally higher margin, and tends to be more predictable and
recurring than hardware procurement revenue making it a particularly attractive
portion of the business mix. Inacom believes that its demonstrated ability to
extend its relationships into the full life cycle of management services
provides it with a competitive advantage in the technology management services
industry. The Company also believes that the growing outsourcing of computer
technology management services along with the Company's focus on faster growing
higher-margin services will allow it to grow its services revenues in excess of
the projected industry growth rate.
Capitalize on Trend Toward Build-To-Order/Configured-To-Order Systems.
Businesses are demanding more efficient, cost-effective procurement and delivery
of custom-configured systems. In response to this demand for build-to-order
services, Inacom has invested $42 million to automate its three assembly and
configuration
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facilities. The Company believes that these facilities are among the most
sophisticated in the industry due to their state-of-the-art infrastructure and
information systems. Two of the Company's assembly and configuration facilities
have complete build-to-order capabilities and the third assembly and
configuration facility will have such capabilities by the end of 1997. Inacom's
strategy is to configure network-ready systems for its business clients on
behalf of vendors such as IBM, Compaq and Hewlett-Packard. Inacom has been
designated as a build-to-order channel participant for each of these three major
vendors.
Expand Service Offerings and Geographic Coverage Through Strategic
Acquisitions. Inacom continually seeks to acquire businesses which enhance its
service capabilities and allow the Company to build geographic coverage in
attractive markets. Inacom has demonstrated its ability to successfully
integrate acquired businesses, having acquired eight businesses during the past
eighteen months. These acquisitions expanded Inacom's offerings in the areas of
procurement, delivery, network integration, network consulting, asset management
and asset registry. These acquisitions also enhanced Inacom's geographic
coverage in key metropolitan markets across the United States. Management
believes that industry trends, including build-to-order, will result in further
consolidation in the highly fragmented technology management services industry.
Inacom's strategy is to use its experience in integrating acquired businesses to
take advantage of strategic acquisition opportunities as they arise.
Capitalize on Convergence of Data and Voice Communications. The Company
is focusing on opportunities resulting from the convergence of voice and data
communications with computer information management systems. Inacom is
leveraging its expertise in providing computer services to assist its business
clients in integrating communications systems to allow voice/data recognition,
remote access, video conferencing, mobile communications and internet access.
Currently, Inacom provides its clients with the communications services and
products of Lucent Technologies, AT&T, Cisco Systems, 3Com and Intel. The
Company believes it is one of the nation's largest independent provider of
communications products for Lucent Technologies.
Life Cycle Management by the Company
As a single source provider of technology products and services, the
Company strives to help its clients optimize their information technology
investments and control ongoing costs throughout the life cycle of the clients'
technology systems. The Company combines a process improvement approach along
with tools and practices gained by experience and trained personnel to assist
its clients in managing the life cycle and costs of distributed technology.
Needs Assessment and Technology Planning. Technology planning services
involve assisting clients in designing and developing standardized technology
platforms. The services include determining standard hardware technology,
application software, operating system software and networking platforms. The
Company assists its clients with the selection and standardization of
manufacturer brands (such as IBM, Compaq, Hewlett-Packard, Microsoft, Lotus and
others) and assists its clients in studying the total cost, performance and
capabilities of these brands and products.
Technology planning services performed by the Company also include the
development of strategies for deployment of distributed technology systems
within its clients' businesses. The Company assists its clients in decisions to
lease or purchase, determining replacement cycles and centralizing acquisition
processes. To assist clients with technology planning, the Company has developed
specific products and programs such as Policy Based ManagementTM, Tactical
Enterprise Network AssessmentTM and Enterprise Technology BlueprintTM.
Technology Procurement and Configuration. Technology procurement and
configuration services generally involve coordinating the technology purchase
process, requisitioning technology products, processing, tracking and reporting
on the status of orders, customizing hardware and software configurations,
direct shipment and shipment tracking. The demand for cost-effective customized
technology systems has driven a significant change in industry procurement
methods including the trend toward build-to-order programs. Inacom believes that
only a limited number of technology providers will have the scale and
configuration capabilities necessary to meet these manufacturer requirements.
Compaq, IBM and Hewlett-Packard have chosen Inacom for participation in their
S-23
build-to-order programs. Inacom has invested $42 million in its state-of-the-art
assembly and delivery systems to provide build-to-order capabilities. The
facilities are strategically located in Swedesboro, New Jersey, Omaha, Nebraska,
and Ontario, California to provide prompt and cost-effective delivery
nationwide.
The Company also focuses its technology procurement services on
shortening the delivery time of technology products, improving compliance to
standards in its clients' organizations, assisting in negotiating hardware and
software agreements on behalf of its clients, and providing other services that
minimize its clients' costs. The Company provides certain clients with on-site
technical procurement specialists who assist and manage the technology
procurement process at client locations nationwide. These procurement
specialists are technically oriented and focus on process improvement and
operational efficiencies in the procurement process.
The Company believes it has a competitive advantage in providing
procurement services through the use of its automated state-of-the-art ordering
systems. The Company's Inacommerce and Inacommerce PlusTM software provide an
easy to use internet-based procurement management system that allows a business
client to determine real-time product availability and order status along with a
custom configurator to assist the client in designing a technology solution from
its desktop computer. The Company's VISIONTM 2000 software also allows a
business client to determine daily product availability, custom configure and
order its technology solution. The Company's Direct Express delivery program
reduces the number of steps in the procurement process by shipping products
directly to the location selected by the business client.
Systems Integration and Systems Management. The Company provides
systems integration services to its clients in an effort to assist clients in
controlling costs and gaining control of the life cycle of its distributed
technology systems. The Company has products and services available to assist,
design and support clients' WANs and LANs and to manage software procurement and
license control. In addition, the Company can provide solutions to its clients
for data storage management, technology security management, capacity planning,
data and database management, and internet and intranet connectivity, support
and management.
The Company provides systems management services that assess the
current state and future needs of a client's distributed technology network to
maximize the value of the client's investment in its networked systems. The
systems management services provided through remote management centers assist
clients in the control and reliability of LAN/WAN environments, provide a study
of adequate network speed and responsive user services and monitor the
infrastructure and system capabilities to satisfy clients' current and future
needs.
The Company employs high-end technical systems engineers and systems
consultants who perform systems integration services at client locations. These
systems engineers and systems consultants, and the project managers who
coordinate their activities, are contracted to the client for hourly rates or
for fixed-price extended contracts.
The Company has developed specific products and programs to assist its
clients in the systems management function, including Inacom Network PatrolTM
and Inacom Network Baseline.TM
Ongoing Systems Support and Distributed Support. The Company provides
its clients ongoing support in their distributed technology systems primarily in
two major areas: "break/fix" hardware maintenance and installation, moves,
addition and changes ("IMACs"). These functions are similar, but differ in the
timing and level of service.
The Company's break/fix hardware maintenance capabilities are supported
directly by the Company's help desk operation, HelpCentralTM. Centralized
break/fix hardware maintenance provides coordination, problem solving, tracking
and control of the clients' hardware maintenance needs. The Company's national
services network, comprised of over 1,500 Company technicians plus over 2,000
technicians in affiliated partner locations provides extensive coverage of
clients' distributed technology.
Similarly, the Company delivers IMAC services to its clients with the
same technician delivery infrastructure. These distributed support services are
managed through various scheduling and reporting tools that
S-24
are interrelated with the Company's VISTATM, VISIONTM, Inacommerce,TM and
Inacommerce PlusTM information systems. Additionally, the Company provides
distributed support services to its clients by providing on-site technical
personnel that may be involved in various support activities, including LAN
administration, network monitoring, general deskside support and some end-user
training.
The Company also offers convergence solutions centered around wide area
data networks, computer and telephone integration, desktop video conferencing,
and wireless data communications. These services include specialized support
programs, maintenance programs and specialized software. The Company provides
communication network services with advanced digital capabilities enabling
voice, data and video communications, utilizing AT&T, Frontier and Westinghouse
networks. The Company's communications services also include long distance,
inbound 800 service, calling cards and teleconferencing featuring account codes
and enhanced billing and customized call reports which allow business clients to
restrict and track telecommunications activity.
Asset Management. Asset management services are becoming increasingly
important as businesses determine what capabilities their existing technology
products have and whether, when and how to upgrade to the latest technology.
Asset management services consist of asset registration, tracking and disposal
of technology assets as they move throughout the client's organization.
The Company has developed a comprehensive program called Inacom Asset
AdvantageTM that contains tools and process improvement techniques to assist its
clients' inventory, track and control distributed technology assets. This
program helps clients meet financial, risk management, custodial, warranty,
maintenance, service and refreshment objectives. The products, including Inacom
Asset Roll-Call,TM can be integrated with HelpCentralTM and also integrated with
the other life cycle products and programs to help lower the total ownership
cost of clients' technology. Additionally, the Company's Computer Resources
International group and Boston Computer Exchange subsidiary provide customized
asset registry, asset tracking services and disposal services to its clients.
Marketing Network
Computer products and services are sold through a marketing network of
approximately 1,000 business centers located throughout the United States, of
which 51 are Company-owned. Communications products and services are provided
through a network of 18 direct sales offices and contractual relationships with
approximately 160 dealers. The Company has international affiliations in Europe,
Asia, Central and South America, the Caribbean, Middle East, Africa, Canada and
Mexico to satisfy the technology management needs of its multinational clients.
The Company's direct sales force in the Company-owned business centers
enables the Company to establish relationships with major corporate clients for
purposes of marketing the Company's technology management services.
Products and Vendors
Computer products include microcomputers, workstations, servers,
monitors, printers and operating systems software. The Company currently
distributes computer products from leading vendors such as Compaq, IBM,
Hewlett-Packard, Toshiba, Lexmark, Novell, Microsoft, Oracle, 3Com, SynOptics,
Cisco, Intel and Network General. Compaq, IBM and Hewlett-Packard represented
greater than 65% and 63% of the Company's net revenues in fiscal 1996 and for
the first six months of 1997, respectively. The Company is the largest purchaser
of IBM computer products and believes it is the second largest purchaser of
Compaq computer products on a world wide basis.
Communications products and services include phone systems, voice mail,
voice processing, data network equipment, multiple small office-home office
offerings and maintenance. The Company also offers network services including
long distance, 800 service, calling cards, wide area value-added data
networking, video conferencing and cellular communications. The products of
Lucent Technologies and the services of AT&T constitute approximately
S-25
90% of the voice and data systems sold by the Company. The Company believes it
is one of the nation's largest independent resellers of Lucent Technology
business products.
The Company has negotiated purchase arrangements, including price,
delivery, training and support, directly with most major vendors. The Company's
extensive vendor relationships allow it to offer over 35,000 products in
providing multiple-vendor solutions to meet its business client's needs. The
Company's agreements with its vendors are generally on a non-exclusive basis and
may be terminated by the vendors on notice typically ranging from 30 to 90 days.
The agreements with vendors generally contain provisions with respect
to product cost, price protection, returns and product allocations; the Company
is entitled to price protection with all major vendors on eligible products in
the Company's inventory in the event of vendor price reductions. Certain vendors
also sponsor payment programs with several financial service organizations to
facilitate product sales through the business centers. In addition, the
Company's primary vendors provide various incentives for promoting and marketing
their products which typically range from 1% to 5% of purchases. The three major
forms of vendor incentives received by the Company are co-operative funds,
market development funds and vendor rebates. Co-operative funds are earned based
upon the sale of the vendor's products and generally must be utilized to offset
the costs associated with advertising and promotion pursuant to programs
established by the respective vendor. Market development funds are earned based
upon the Company's purchases from the vendor and generally must be used for
market development activities approved by the respective vendor. Vendor rebates
are based upon the Company's attaining purchase volume targets established with
the vendor. Rebates generally can be used at the Company's discretion.
International Capabilities
InaCom International, a subsidiary of the Company, has international
affiliations in Europe, Asia, Central and South America, the Caribbean, Middle
East, Africa, Canada and Mexico to satisfy the technology management needs of
its multinational clients. ICG, an affiliation of leading independent
organizations in various countries, provides pc-related products and services to
international corporate clients. Inacom's capabilities in international project
management and local resources of the affiliated members allow Inacom to serve
the global needs of its multinational clients' information technology projects.
Inacom Latin America, a 60% owned subsidiary of the Company, provides
international logistics and configuration services in Mexico, the Caribbean,
Central and South America.
Clients
The Company is not dependent for a material part of its business upon a
single or a few clients and the loss of any one client would not have a material
adverse effect on the Company's business.
Employees
At June 28, 1997 the number of employees was 4,309, including 1,813
systems engineers, technicians and service support employees. In addition, at
June 28, 1997 the Company had contracted for the services of approximately 600
systems engineers and consultants, and through an alliance with selected
independent resellers has access to the services of approximately 2,000
additional services personnel. None of the employees is covered by a collective
bargaining agreement. The Company considers its relations with employees to be
good.
Competition
All aspects of the technology management services industry are highly
competitive. The technology management industry continues to experience a
significant amount of consolidation. In the future Inacom may face fewer but
larger and better financed competitors as a consequence of such consolidation.
The Company's marketing network competes for potential clients, including
national accounts, with numerous resellers and distributors. Several computer
manufacturers have expanded their channels of distribution, pricing and product
positioning and
S-26
compete with the Company's marketing network for potential clients. Other
competitors operate mail-order or discount stores offering clones of major
vendor products. The Company also competes with other computer technology
providers in the recruitment and retention of franchisees and
independently-owned resellers. The Company competes in the computer services
industry with a large number of service providers, including IBM through its
Global Services division, Andersen Consulting, CompuCom, EDS, ENTEX, GE Capital
Technology Management Service, IKON Offices Solutions and Vanstar. Competition
in communication products and services is also intense, and includes entities
which are also significant vendors of the Company, such as Lucent Technologies
and AT&T. Certain competitors and manufacturers are substantially larger than
the Company and have greater financial, technical, service and marketing
resources. The Company's marketing network competes primarily on the basis of
professionalism and client contact, quality of product line, availability of
products, service, after-sale support, price, and quality of end-user training.
Service Mark and Trademark
The Company holds United States service mark and trademark
registrations for the marks "Inacom", "ValCom" and "Inacomp." The Company also
has certain state registrations. The Company claims common law rights to the
marks based on adoption and use. To the Company's knowledge, there are no
pending interference, opposition or cancellation proceedings, or litigation
threatened or claimed, with respect to the marks in any jurisdiction.
Government Regulation
The Company is subject to various federal, state and local laws and
regulations affecting businesses generally such as laws and regulations
concerning employment, workplace safety and protection of the environment. The
Company is also subject to federal and state laws regulating franchise
relationships which generally impose registration and/or disclosure requirements
on the Company in the offer and sale of franchises and also regulate related
advertisements. The Company believes it is in substantial compliance with all
such laws and regulations.
S-27
MANAGEMENT
The Company's executive officers and directors are listed below,
together with their ages and offices held by them. The Company's Board of
Directors consists of nine members elected annually.
Name Age Position
Bill L. Fairfield 50 Director, President and Chief Executive Officer
David C. Guenthner 47 Executive Vice President and Chief Financial Officer
Michael A. Steffan 45 President, Distribution and Operations, and Secretary
Cris Freiwald 42 President and General Manager, International Division
Robert A. Schultz 54 Group Executive, Information Systems Group
Larry Fazzini 50 Vice President of Corporate Resources
George DeSola 50 Group Executive, Technology Service Group and President,
Inacom Communications
Jeffrey A. Hartigan 54 Vice President and Chief Information Officer
Steven Ross 39 President, Reseller Division and Corporate Marketing
Leon Kerkman 38 Vice President, Corporate Controller
Paul Kellenberger 37 Vice President of Planning and Business Development
Joseph Auerbach 80 Director
Mogens C. Bay 48 Director
James Q. Crowe 48 Director
W. Grant Gregory 56 Director
Rick Inatome 43 Director
Joseph Inatome 71 Director
Gary Schwendiman 56 Director
Linda S. Wilson 60 Director
Bill L. Fairfield has been President, Chief Operating Officer and a
director of the Company since March 1985. He was named Chief Executive Officer
in September 1987.
David C. Guenthner was named Executive Vice President and Chief
Financial Officer in November 1991. Prior to November 1991, Mr. Guenthner was
Senior Vice President of Finance and Chief Financial Officer for the Company.
Michael A. Steffan was named President of Distribution and Operations
in December 1995. Mr. Steffan was responsible for the Reseller Division from
December 1994 to December 1995 in addition to his position as President of
Distribution and Operations, a position he had held since May 1993. Prior to May
1993, Mr. Steffan was Vice President of Corporate Development and Secretary for
the Company.
Cris Freiwald was named President of the International Division in
November 1994. Mr. Freiwald was Vice President of Corporate Development from May
1993 to November 1994. Prior to May 1993, Mr. Freiwald was Director of Business
Development.
Robert A. Schultz was named Group Executive of the Information Systems
Group in December 1996. Prior to December 1996, Mr. Schultz was the President
and General Manager of Direct Operations, a position he has held since April
1994, and the President and General Manager of Client Services Division, a
position he had held from January 1993 to December 1996. Mr. Schultz was
responsible for Direct Operations and the Advanced Systems and Services Group
for the Company from August 1991 to January 1993.
S-28
Larry Fazzini was named Vice President of Corporate Resources in
February 1993 when he joined the Company. Prior to February 1993, Mr. Fazzini
was the Director of Human Resources for Sears Business Centers, Inc., a
distributor of information technology products and services.
George DeSola was named Group Executive of the Technology Services
Group in December 1996 in addition to his position as President of Inacom
Communications, a position he has held since he joined the Company in March
1994. Mr. DeSola was responsible for Corporate Marketing from December 1994 to
December 1996 in addition to his position as President of Inacom Communications.
Prior to March 1994, Mr. DeSola was the Vice President of Marketing and Customer
Service for MCI Communications Corp., a telecommunications company.
Jeffrey A. Hartigan was named Vice President and Chief Information
Officer in May 1995 when he joined the Company. Prior to May 1995, Mr. Hartigan
was Vice President of Information Services at Northern Telecommunications Inc.
(NORTEL), a telecommunications company.
Steven Ross was named President of the Reseller Division and Corporate
Marketing in December 1996. Prior to December 1996, Mr. Ross was the President
of the Reseller Division, a position he has held since he joined the Company in
December 1995. Mr. Ross was Vice President of Sales and Business Development at
Intelligent Electronics Inc., a distributor of information technology products,
from September 1993 to November 1995. Prior to September 1993, Mr. Ross was the
Executive Vice President of Ultimate/Allerion Corp., an international systems
integrator company.
Leon Kerkman was named Vice President and Corporate Controller in June
1993. Prior to June 1993, Mr. Kerkman was Corporate Controller, a position he
has held since he joined the Company in 1989.
Paul Kellenberger was named Vice President of Business Development in
March 1997 when he joined the Company. Mr. Kellenberger was the Vice President
of Worldwide Channels, Computer Group from January 1995 to February 1997 and the
General Manager, Canada from February 1994 to December 1994 at Motorola Inc.
Prior to February 1994, Mr. Kellenberger was the Director of Marketing, Canada
for Digital Equipment Company, an information technology products company.
Joseph Auerbach is Professor of Business Administration, Emeritus, at
the Harvard Business School. He is Counsel to the firm of Sullivan & Worcester,
Boston, Massachusetts.
Mogens C. Bay is the President and Chief Executive Officer of Valmont
Industries, Inc. He is a director of ConAgra, Inc.
James Q. Crowe is the President and Chief Executive Office of Kiewit
Diversified Group, Inc. He is a director of Peter Kiewit Sons' Inc., CalEnergy,
Inc. and C-TEC Corporation.
W. Grant Gregory is Chairman of Gregory & Hoenemeyer, Inc., New York
and serves as a director of Bozell Inc., Ambac, Inc., Ambac Indemnity Group and
HCIA Health Care Inc.
Rick Inatome is Chairman of the Board of Directors and in 1976 was the
co-founder of Inacomp Computer Centers, Inc. and its Chief Executive Officer
from 1979 to August 1991. He is a director of Atlantic Premium Brands, American
Speedy Print, Liberty BIDCO, Action Technologies, Inc. and Saturn Electronic and
Engineering, Inc.
Joseph Inatome is a co-founder of Inacomp Computer Centers, Inc., and
was an executive officer until July 1989, and director until August 1991. He is
currently a director of American Speedy Print.
Gary Schwendiman is Professor of International Studies in the College
of Business at the University of Nebraska-Lincoln and was Dean of the College of
Business Administration for the University of Nebraska-Lincoln
S-29
from 1977 to 1994. Mr. Schwendiman serves as a director of The Gallup
Organization, Inc. and Security Mutual Life Insurance Co.
Linda S. Wilson is the President of Radcliffe College. She is a
director of Citizens Financial Group and Trustee of Massachusetts General
Hospital Corporation.
LEGAL MATTERS
The validity of the Securities offered hereby have been passed upon for
the Company by McGrath, North, Mullin & Kratz, P.C., Omaha, Nebraska and for the
Underwriters by Katten Muchin & Zavis, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of InaCom Corp. as
of December 28, 1996 and December 30, 1995, and for each of the years in the
three-year period ended December 28, 1996, included herein and incorporated by
reference in the registration statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
INACOM CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
CONSOLIDATED ANNUAL FINANCIAL STATEMENTS (Audited)
Independent Auditors' Report..................................................................... F-2
Consolidated Statements of Operations-- Three-Year Period Ended December 28, 1996....... F-3
Consolidated Balance Sheets-- December 28, 1996 and December 30, 1995............................ F-4
Consolidated Statements of Stockholders' Equity -- Three-Year Period
Ended December 28, 1996................................................................. F-5
Consolidated Statements of Cash Flows-- Three-Year Period Ended December 28, 1996................ F-6
Notes to Consolidated Financial Statements-- Three-Year Period Ended December 28, 1996........... F-7
SCHEDULE-- Valuation and Qualifying Accounts............................................ F-16
CONSOLIDATED FINANCIAL STATEMENTS FOR THE QUARTER AND
SIX MONTHS ENDED JUNE 28, 1997 (Unaudited)
Condensed and Consolidated Balance Sheets-- June 28, 1997 and December 28, 1996......... F-17
Condensed and Consolidated Statement of Operations -- Thirteen Weeks Ended June 28, 1997
and June 29, 1996 and Twenty-Six Weeks Ended June 28, 1997 and June 29, 1996............ F-18
Condensed and Consolidated Statement of Cash Flows -- Twenty-Six Weeks Ended June 28, 1997
and June 29, 1996....................................................................... F-19
Notes to Condensed and Consolidated Financial Statements -- Twenty-Six Weeks Ended
June 28, 1997........................................................................... F-20
All other schedules have been omitted as the required information is
inapplicable or the information is included in the consolidated financial
statements or related notes.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
InaCom Corp.:
We have audited the accompanying consolidated financial statements of
InaCom Corp. and subsidiaries as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InaCom Corp.
and subsidiaries at December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 28, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Omaha, Nebraska
February 21, 1997
F-2
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
Three-year period ended December 28, 1996
(Amounts in thousands, except per share data)
1996 1995 1994
----------- ------------ ------------
Revenues:
Computer products......................................... $ 2,885,019 2,047,215 1,680,397
Computer services......................................... 136,888 95,476 85,406
Communications products and services...................... 80,148 57,653 34,736
----------- ------------ ------------
.......................................................... 3,102,055 2,200,344 1,800,539
----------- ------------ ------------
Direct costs:
Computer products......................................... 2,722,368 1,924,829 1,571,700
Computer services......................................... 33,660 27,877 32,900
Communications products and services...................... 62,668 43,832 27,220
----------- ------------ ------------
.......................................................... 2,818,696 1,996,538 1,631,820
----------- ------------ ------------
Gross margin.............................................. 283,359 203,806 168,719
Selling, general and administrative expenses ................. 231,235 169,338 160,437
----------- ------------ ------------
Operating income.......................................... 52,124 34,468 8,282
Interest expense.............................................. 20,405 14,635 12,031
----------- ------------ ------------
Earnings (loss) before income taxes ...................... 31,719 19,833 (3,749)
Income tax expense (benefit).................................. 12,986 8,126 (1,493)
----------- ------------ -----------
Net earnings (loss)....................................... $ 18,733 11,707 (2,256)
Earnings (loss) per share:
Primary................................................... $ 1.76 1.14 (.22)
Fully diluted............................................. $ 1.64 1.14 (.22)
Common shares and equivalents outstanding:
Primary................................................... 10,600 10,300 10,300
Fully diluted............................................. 12,000 10,300 10,300
See accompanying notes to consolidated financial statements.
F-3
INACOM CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 28, 1996 and December 30, 1995
(Amounts in thousands, except share data)
Assets 1996 1995
------ ----------- --------
Current assets:
Cash and cash equivalents......................................... $ 31,410 20,690
Accounts receivable, less allowance for doubtful
accounts of $4,385 in 1996 and $3,537 in 1995................ 288,407 160,306
Deferred income taxes............................................. 3,554 4,202
Inventories....................................................... 386,592 352,948
Other current assets.............................................. 2,335 1,794
----------- -----------
Total current assets......................................... 712,298 539,940
----------- -----------
Property and equipment, at cost....................................... 116,970 85,922
Less accumulated depreciation..................................... 57,845 44,421
----------- -----------
Net property and equipment................................... 59,125 41,501
----------- -----------
Other assets, net of accumulated amortization......................... 27,531 17,831
Cost in excess of net assets of business acquired,
net of accumulated amortization................................... 48,646 24,966
----------- -----------
............................................................. $ 847,600 624,238
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................. $ 406,753 331,221
Notes payable and current installments of long-term debt.......... 140,770 83,526
Income taxes payable.............................................. 3,531 384
Other current liabilities............................................. 60,941 33,869
----------- -----------
Total current liabilities.................................... 611,995 449,000
----------- -----------
Long-term debt, excluding current installments........................ 55,250 23,667
Other long-term liabilities........................................... 73 --
Deferred income taxes................................................. 3,452 2,796
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 10,850,008 shares
in 1996 and 10,040,000 in 1995............................... 1,085 1,004
Additional paid-in capital........................................ 98,153 89,528
Retained earnings............................................ 77,607 58,874
----------- -----------
............................................................. 176,845 149,406
Less:
Cost of common shares in treasury of 19,989 in 1995............... -- (161)
Unearned restricted stock......................................... (15) (470)
----------- -----------
Total stockholders' equity................................... 176,830 148,775
----------- -----------
Commitments and contingent liabilities................................
............................................................. $ 847,600 624,238
See accompanying notes to consolidated financial statements.
F-4
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Three-year period ended December 28, 1996
(Amounts in thousands, except share data)
Additional Unearned Total
Common paid-in Retained Treasury restricted stockholders'
stock capital earnings stock stock equity
Balance at December 25, 1993....... $ 1,004 88,928 49,423 (2,034) (830) 136,491
Net loss........................... - - (2,256) - - (2,256)
Issuance of 3,400 treasury shares
as director compensation........... - 11 - 30 - 41
Issuance of 35,253 treasury
shares under stock option plans.... - 209 - 310 - 519
Issuance of 16,800 treasury shares
as stock awards, net of forfeitures - 166 - 161 468 795
--- -------- ---- ------ --- ---------
Balance at December 31, 1994....... 1,004 89,314 47,167 (1,533) (362) 135,590
Net earnings....................... - - 11,707 - - 11,707
Issuance of 4,400 treasury shares
as director compensation........... - (1) - 39 - 38
Issuance of 89,993 treasury
shares under stock option plans.... - 240 - 790 - 1,030
Issuance of 61,800 treasury shares
as stock awards, net of forfeitures - (25) - 543 (108) 410
--- ------- ----- ----- --- ---------
Balance at December 30, 1995....... 1,004 89,528 58,874 (161) (470) 148,775
Net earnings....................... - - 18,733 - - 18,733
Issuance of 691,131 shares in connection
with business combinations......... 69 6,581 - - - 6,650
Issuance of 132,966 treasury and common
shares under stock option plans.... 12 1,956 - 161 - 2,129
Issuance of 3,400 shares
as director compensation........... - 60 - - - 60
Issuance of 2,500 shares
as stock awards, net of forfeitures - 28 - - 455 483
--- ------ ------ --- --- ---------
Balance at December 28, 1996....... $ 1,085 98,153 77,607 - (15) 176,830
See accompanying notes to consolidated financial statements.
F-5
INACOM CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three-year period ended December 28, 1996
(Amounts in thousands)
1996 1995 1994
----------- ----------- ----------
Cash flows from operating activities:
Net earnings (loss)....................................... $ 18,733 11,707 (2,256)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization......................... 21,814 19,059 19,766
Changes in assets and liabilities, net
of effects from business combinations:
Accounts receivable.............................. (123,648) (75,333) (22,496)
Inventories...................................... (31,794) (124,296) (41,783)
Other current assets............................. 97 (610) 463
Accounts payable................................. 71,162 105,100 122,961
Other liabilities................................ 20,896 5,444 5,983
Income taxes..................................... 4,451 1,195 (2,192)
----------- ----------- -----------
Net cash provided (used) by
operating activities...................... (18,289) (57,734) 80,446
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment....................... (26,240) (10,346) (14,910)
Business combinations..................................... (23,386) - -
Payments from (advances of) notes receivable.............. 446 (1,872) 917
Other, including advances to affiliates................... (11,950) (1,051) (1,816)
----------- ----------- -----------
Net cash used in investing activities........ (61,130) (13,269) (15,809)
----------- ----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt ..................... (30,334) (6,667) -
Proceeds from receivables sold............................ - 100,000 -
Proceeds from (payments of) notes payable................. 63,094 (13,184) (81,314)
Proceeds from long-term debt.............................. 55,250 - 17,000
Proceeds from the exercise of employee stock options...... 2,129 1,030 519
----------- ----------- -----------
Net cash provided by (used in)
financing activities...................... 90,139 81,179 (63,795)
----------- ----------- -----------
Net increase in cash and cash equivalents...................... 10,720 10,176 842
Cash and cash equivalents, beginning of year................... 20,690 10,514 9,672
----------- ----------- -----------
Cash and cash equivalents, end of year......................... $ 31,410 20,690 10,514
See accompanying notes to consolidated financial statements.
F-6
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The consolidated financial statements include the accounts of InaCom
Corp. (Company) and its wholly-owned subsidiaries. The Company is a leading
provider of management technology services which include technology procurement
and distribution of microcomputer systems, workstations, networking and
telecommunications equipment, systems integration and support services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(b) 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 December 28, 1996, $37.3 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 December 28, 1996,
the implicit interest rate on the receivable sale transaction was 5.9%. On
January 13, 1997, the agreement was amended to sell an additional $100 million
of accounts receivable.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of computer hardware, software, voice and data equipment and
related materials.
(d) Other Assets
Other assets include vendor authorization rights and long-term notes
receivable. Vendor authorization rights are being amortized over 10 years.
(e) Cost in Excess of Net Assets of Business Acquired
The excess of the cost over the carrying value of assets of business
acquired is being amortized over 20 years. The Company assesses the
recoverability of intangible assets by determining whether the amortization of
the asset balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
(f) Depreciation
Depreciation is provided over the estimated useful lives of the
respective assets ranging from 3 to 31 years using the straight-line method.
F-7
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
(g) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(h) Earnings/(Loss) Per Common Share
Primary earnings/(loss) per share of common stock have been computed on
the basis of the weighted average number of shares of common stock outstanding
after giving effect to equivalent common shares from dilutive stock options.
Fully diluted earnings/(loss) per share further assumes the conversion of the
Company's convertible subordinated debentures for the period they were
outstanding.
(i) Revenue and Expense Recognition
The Company recognizes revenue from product sales upon shipment to the
customer. Revenues from consulting and other services are recognized as the
Company performs the services. Revenues from maintenance and extended warranty
agreements are recognized ratably over the term of the agreement. Extended
warranty costs are accounted for on an accrual basis and are recognized under
the sales method.
(j) 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.
(k) Risks and Uncertainties
Financial instruments which potentially expose the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells product to a large number of customers in many different
industries and geographies. To minimize credit concentration risk, the Company
utilizes several financial services organizations which purchase accounts
receivable and perform ongoing credit evaluations of its customers' financial
conditions.
The Company's business is dependent in large measure upon its
relationship with key vendors since a substantial portion of the Company's
revenue is derived from the sales of the products of such key vendors.
Termination of, or a material change to the Company's agreements with these
vendors, or a material decrease in the level of marketing development programs
offered by manufacturers, or an insufficient or interrupted supply of vendors'
product would have a material adverse effect on the Company's business.
F-8
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(l) Disclosures About Fair Value of Financial Instruments
The carrying amounts for cash and cash equivalents, accounts
receivable, accounts payable and notes payable approximate fair value because of
the short maturity of these instruments. The fair values of each of the
Company's long-term debt instruments are based on the amount of future cash
flows associated with each instrument discounted using the Company's current
borrowing rate for similar debt instruments of comparable maturity. The
estimated fair value of the Company's long-term debt at December 28, 1996
approximates book value.
(m) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers cash and temporary cash investments with a maturity of three months or
less to be cash equivalents.
2. BUSINESS COMBINATIONS
During 1996, the Company completed several acquisitions. In April 1996,
the Company acquired Technology Express, a network integrator in the Nashville,
Tennessee market for consideration of approximately $4.8 million in cash and
89,286 shares of common stock in a transaction accounted for as a purchase. The
excess purchase price over the estimated fair value of the net assets acquired
was $6.2 million and is being amortized using the straight-line method over 20
years.
In August 1996, the Company acquired Computer Access International for
consideration including approximately $7.6 million in cash and 238,209 shares of
common stock in a transaction accounted for as a purchase. The excess purchase
price over the estimated fair value of the net assets acquired was $8.0 million
and is being amortized using the straight line method over 20 years.
In December 1996, the Company acquired Gorham Clark, Inc., a network
consulting business in New York, New York for consideration of approximately
$12.0 million in cash in a transaction accounted for as a purchase. The Company
may also issue up to a maximum of 122,278 shares of common stock over the next
two years, contingent upon future results of the acquired business. The excess
purchase price over the estimated fair value of the net assets acquired was
$10.0 million and is being amortized using the straight-line method over 20
years.
In December 1996, the Company acquired all the issued and outstanding
shares of Perigee Communications Inc. of Minneapolis, Minnesota and Networks,
Inc. of Miami, Florida for 272,726 and 90,910 shares of common stock,
respectively, in transactions accounted for as "poolings of interest." The
Company's consolidated financial statements for the year ended December 28, 1996
include the fourth fiscal quarters' activity for the acquired businesses. Prior
period consolidated financial statements were not restated as the results of
operations would not have been materially different than those previously
reported by the Company. The effect of the immaterial poolings was to increase
stockholders' equity by approximately $643,000.
F-9
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
If the above business combinations had occurred on December 26, 1993,
the pro forma operations of the Company would not have been materially different
than that reported in the accompanying consolidated statements of operations.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
1996 1995
---- ----
Land, buildings and improvements ................... $ 13,911 10,541
Furniture, fixtures and equipment .................. 27,875 18,392
Computer equipment ................................. 53,239 35,340
Computer parts held for repair and exchange ........ 21,945 21,649
-------- --------
$116,970 85,922
4. INCOME TAXES
Income tax expense (benefit) consists of the following:
1996 1995 1994
---------- ---------- --------
Current:
Federal ....................... $10,195 6,151 487
State ................... 1,488 943 92
Deferred:
Federal ................. 1,209 897 (1,789)
State ................... 94 135 (283)
------- ------- -------
$12,986 8,126 (1,493)
The reconciliation of the statutory Federal income tax rate and the effective
tax rate are as follows:
1996 1995 1994
---------- ---------- ---------
Statutory Federal income tax rate............... 35.0% 35.0% 34.0%
State income taxes, net of
Federal benefit........................ 3.2 3.6 4.7
Other.................................. 2.8 2.4 1.1
---------- ---------- ---------
41.0% 41.0% 39.8%
F-10
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
1996 1995
------ ------
Deferred tax assets:
Valuation reserves ................................ $5,726 3,324
Accrued expenses not deducted until paid .......... 2,188 1,275
Other ............................................. -- 2
------ ------
Total deferred tax assets ......................... 7,914 4,601
------ ------
Deferred tax liabilities:
Vendor discounts .................................. 2,766 --
Depreciation ...................................... 4,241 2,725
Other ............................................. 805 470
------ ------
Total deferred tax liabilities .................... 7,812 3,195
------ ------
Net deferred tax assets ........................... $ 102 1,406
There was no valuation allowance for deferred tax assets at December 28, 1996 or
December 30, 1995.
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company's primary sources of liquidity are provided through a
working capital financing agreement for $350.0 million, a revolving credit
facility of $40.0 million and convertible subordinated debentures of $55.25
million. The $350.0 million working capital financing agreement, which is
provided by an unrelated financial services organization, expires June 29, 1998.
At December 28, 1996, $100.8 million was outstanding under the working capital
line and the interest rate was 7.4% based on LIBOR. The working capital
financing agreement is secured by accounts receivable and inventories.
The Company entered into a revolving credit facility agreement in
February 1996 with an unrelated financial institution. The $40.0 million
revolving credit facility agreement expires in February 1998. At December 28,
1996, $40.0 million was outstanding under the revolving credit facility and the
interest rate was 6.8% based on LIBOR. The revolving credit facility is secured
by accounts receivable and inventories.
The working capital financing agreement and the revolving credit
facility agreement contain certain restrictive covenants, including the
maintenance of minimum levels of working capital, tangible net worth,
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 agreements at December 28, 1996.
F-11
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
A summary of long-term debt follows:
1996 1995
------- -------
Private placement notes (a) .............................. $ -- 30,334
Convertible subordinated debentures (b) .................. 55,250 --
------- -------
Total long-term debt ............................. 55,250 30,334
Less current installments ................................ -- 6,667
------- -------
Long-term debt, excluding current installments ... $55,250 23,667
(a) The private placement notes were held by unaffiliated
insurance companies. The balances of the notes were paid in
full in December 1996.
(b) In June 1996, the Company issued $55.25 million of 6.0%
convertible subordinated debentures due June 15, 2006. The
debentures are convertible into common stock of the Company at
a conversion price of $24.00 per share, subject to adjustments
under certain circumstances, beginning on September 19, 1996.
The debentures are not redeemable by the Company prior to June
16, 2000 and thereafter the Company may redeem the debentures
at various premiums to principal amount. The debentures may
also be redeemed at the option of the holder at any time prior
to June 16, 2000 if there is a Change in Control (as defined
in the indenture) at a price equal to 100% of the principal
amount plus accrued interest at the date of redemption. The
net proceeds from the sale of the 6% debentures were used to
reduce a portion of the outstanding balance of the working
capital financing agreement which carried an interest rate at
the time of the debenture sale of 7.3%.
6. CREDIT ARRANGEMENTS
The Company has floor plan agreements to take advantage of vendor
financing programs. The agreements were secured by $122.7 million of the
Company's inventory at December 28, 1996 and $111.9 million at December 30,
1995. The Company has entered into dealer working capital financing agreements
with several financial services organizations which purchase, primarily,
accounts receivable from the Company. The Company had contingent liabilities of
$1.8 million at December 28, 1996 and $7.9 million at December 30, 1995 relating
to these agreements.
7. LEASES
The Company operates in leased premises which include the general
offices, warehouse facilities and Company-owned branches. Operating lease terms
range from monthly to ten years and generally provide for renewal options. Rent
expense for operating leases was approximately $12.0 million, $9.8 million, and
$8.6 million for the three years ended December 28, 1996, respectively.
F-12
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
Future minimum operating lease obligations for the years 1997 through
2001 are $12.6 million, $10.6 million, $8.9 million, $6.6 million and $5.7
million, respectively. It is anticipated that leases will be renewed or replaced
as they expire such that future lease obligations will approximate rent expense
for 1996.
8. EMPLOYEE RETIREMENT BENEFIT PLAN
The Company maintains a qualified savings plan under Section 401(k) of
the Internal Revenue Code (IRC) which covers substantially all full-time
employees. Annual contributions to the qualified plan, based on participant's
annual pay, are made by the Company. Participants may also elect to make
contributions to the plan. Employee contributions are matched by the Company up
to limits prescribed by the IRC. Company contributions to the plan approximated
$3.3 million in 1996, $2.4 million in 1995 and $1.8 million in 1994.
The Company maintains a nonqualified savings plan for employees whose
benefits under the qualified savings plans are reduced because of limitations
under Federal tax laws. Contributions made to this plan were not material.
9. LITIGATION
The Company is involved in a limited number of legal actions.
Management believes that the ultimate resolution of all pending litigation will
not have a material adverse effect on the Company's consolidated financial
statements.
10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are summarized as follows:
1996 1995 1994
------- ------ ------
Interest paid .................. $19,611 14,054 12,599
Income taxes paid .............. 8,176 6,931 890
Components of cash used for acquisitions as reflected in the
consolidated statements of cash flows are summarized as follows:
1996
Fair value of assets acquired $ 41,965
Liabilities assumed (11,436)
Fair value of common stock issued (7,143)
-------------
Cash paid at closing, net of cash acquired $ 23,386
F-13
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
11. STOCK OPTION AND AWARD PROGRAMS
The Company has two stock plans approved by the shareholders in 1994
and 1990, and a nonqualified stock option plan approved by shareholders in 1987.
Options granted under the stock plans may be either nonqualified or incentive
stock options. The option price, vesting period and term under the stock plans
and the nonqualified stock option plan are set by the Compensation Committee of
the Board of Directors of the Company. The option price may not be less than the
fair market value per share at the time the option is granted. The vesting
period of options granted typically ranges from 2 to 3 years, and the term of
any option granted may not exceed ten years. The stock plans also permit the
issuance of restricted or bonus stock awards by the Compensation Committee. At
December 28, 1996, the Company had approximately 80,000 shares available for
issuance pursuant to subsequent grants under the plans.
Additional information as to shares subject to options is as follows:
Weighted
average
Number of Exercise price exercise
options per option price
Options outstanding at December 25, 1993 684,000 $ 5.85 to 19.75 13.73
Granted 193,500 8.00 to 12.00 10.20
Exercised (35,000) 7.25 to 14.62 11.74
Canceled (42,000) 7.02 to 14.50 12.21
-------------
Options outstanding at December 31, 1994 800,500 5.85 to 19.75 13.01
Granted 157,000 9.56 to 14.69 9.82
Exercised (90,000) 7.25 to 12.00 10.26
Canceled (68,500) 5.85 to 14.63 12.45
-------------
Options outstanding at December 30, 1995 799,000 5.85 to 19.75 12.76
Granted 36,500 35.56 35.56
Exercised (133,000) 5.85 to 14.63 10.77
Canceled (21,000) 5.85 to 14.63 9.56
-------------
Options outstanding at December 28, 1996 681,500 8.00 to 35.56 14.47
Exercisable at December 28, 1996 428,000 $ 8.00 to 19.75 12.74
F-14
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
The Company accounts for stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Accordingly, the Company
has not recognized compensation expense for its options granted in 1995 and
1996. In 1996, the Company adopted FASB Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. FASB Statement No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net earnings and earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in FASB Statement No. 123 had
been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB Statement
No. 123.
The per share weighted-average fair value of stock options granted
during 1996 and 1995 was $30.96 and $7.83, respectively, on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 - expected dividend yield 0.0%, risk-free interest rate of
6.1%, expected volatility factor of 192.9%, and an expected life of 2.5 years;
1995 - expected dividend yield 0.0%, risk-free interest rate of 5.7%, expected
volatility factor of 133.8%, and an expected life of 3.7 years.
Since the Company applies APB Opinion No. 25 in accounting for its
plans, no compensation cost has been recognized for its stock options in the
consolidated financial statements. Had the Company recorded compensation cost
based on the fair value at the grant date for its stock options under FASB
Statement No. 123, the Company's net earnings for 1996 and 1995 would have been
reduced by approximately 1.9% and 0.6%, respectively, and the Company's earnings
per share, fully diluted, for 1996 and 1995 would have been reduced by
approximately 1.2% and 0.9%, respectively.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under FASB Statement No. 123 is not reflected in the pro forma net earnings
amounts presented above, because compensation cost is reflected over the
options' vesting period of two and three years for the 1996 and 1995 options,
respectively. Compensation costs for options granted prior to January 1, 1995
are not considered.
F-15
INACOM CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Three-year period ended December 28, 1996
(Columnar dollar amounts in thousands, except per share data)
SCHEDULE
INACOM CORP. AND SUBSIDIARIES
Valuation and Qualifying Accounts
(Amounts in thousands)
Balance at Charged to Amounts Balance
beginning costs and written at end
of period expenses off(1) of period
---------- -------- ----------- ---------
Fiscal year ended December 28, 1996 -
Allowance for doubtful accounts.............. $ 3,537 1,626 778 4,385
Fiscal year ended December 30, 1995 -
Allowance for doubtful accounts.............. $ 2,626 2,308 1,397 3,537
Fiscal year ended December 31, 1994 -
Allowance for doubtful accounts.............. $ 2,784 1,691 1,849 2,626
(1) The deductions from reserves are net of recoveries.
F-16
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands)
June 28, December 28,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 30,720 31,410
Accounts receivable, net................................................ 257,358 288,407
Inventories............................................................. 464,145 386,592
Other current assets.................................................... 8,843 5,889
------------- ------------
Total current assets............................................... 761,066 712,298
------------- ------------
Other assets, net........................................................... 45,513 27,531
Cost in excess of net assets of business acquired, net of
accumulated amortizations................................................ 68,659 48,646
Property and equipment, net................................................. 69,674 59,125
------------- ------------
............................................................... $ 944,912 847,600
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 479,746 406,753
Notes payable........................................................... 120,000 140,770
Other current liabilities............................................... 79,451 64,472
------------- ------------
Total current liabilities.......................................... 679,197 611,995
------------- ------------
Long-term debt.............................................................. 55,250 55,250
Other long-term liabilities................................................. 3,453 3,525
Stockholders' equity:
Capitol 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 11,537,315 in 1997 and 10,850,008 shares in 1996 1,153 1,085
Additional paid-in capital......................................... 116,298 98,153
Retained earnings.................................................. 89,561 77,607
------------- ------------
............................................................... 207,012 176,845
Less:
Unearned restricted stock.......................................... -- (15)
------------- ------------
Total stockholders' equity......................................... 207,012 176,830
------------- ------------
............................................................... $ 944,912 847,600
See accompanying notes to consolidated financial statements.
F-17
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Data)
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 28, June 29, June 28, June 29,
----------------------------------------------------------
1997 1996 1997 1996
------------- ------------- ------------- ---------
Revenues:
Computer products............................... $ 884,952 718,585 $ 1,657,705 1,316,307
Computer services............................... 60,607 30,201 108,238 58,340
Communication products and services............. 26,655 21,074 47,961 37,294
------------ ------------- ------------- -------------
Total...................................... 972,214 769,860 1,813,904 1,411,941
------------ ------------- ------------- -------------
Direct costs:
Computer products............................... 836,876 677,760 1,565,625 1,241,991
Computer services............................... 14,881 7,347 28,380 15,550
Communications products and services............ 21,583 16,620 37,782 29,086
------------ ------------- ------------- -------------
................................................ 873,340 701,727 1,631,787 1,286,627
------------ ------------- ------------- -------------
Gross margin......................................... 98,874 68,133 182,117 125,314
Selling, general and administrative expenses 80,354 55,588 147,671 102,829
------------ ------------- -------------- -------------
Operating income..................................... 18,520 12,545 34,446 22,485
Interest expense..................................... 7,148 5,046 14,184 9,919
------------ ------------- ------------- -------------
Earnings before income tax........................... 11,372 7,499 20,262 12,566
Income tax expense .................................. 4,663 3,075 8,308 5,152
------------ ------------- ------------- -------------
Net earnings......................................... $ 6,709 4,424 $ 11,954 7,414
Earnings per share
Primary......................................... $ .58 .43 $ 1.04 .72
Fully diluted................................... $ .52 .42 .94 .71
Common shares and equivalents outstanding
Primary...................................... 11,600 10,300 11,500 10,300
Fully diluted................................ 13,900 10,700 13,800 10,500
See accompanying notes to consolidated financial statements.
F-18
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Twenty-Six Weeks Ended
June 28, June 29,
1997 1996
Cash flows from operating activities:
Net earnings ..................................................................... $ 11,954 7,414
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization................................................. 14,256 9,720
Increase in accounts receivable............................................... (55,200) (41,182)
(Increase) decrease in inventories............................................ (74,070) 48,585
Increase in other current assets.............................................. (2,599) (395)
Increase (decrease) in accounts payable....................................... 68,840 (69,691)
(Decrease) increase in other long-term liabilities............................ (83) 226
(Decrease) increase in other current liabilities.............................. (7,107) 13,219
----------- ---------
Net cash used in operating activities.................................... (44,009) (32,104)
----------- ---------
Cash flows from investing activities:
Additions to property and equipment............................................... (19,836) (10,016)
Proceeds from notes receivable.................................................... 100 1,605
Business combinations............................................................. (4,100) --
Increase in other assets.......................................................... (12,085) (10,472)
----------- ---------
Net cash used in investing activities......................................... (35,921) (18,883)
----------- ---------
Cash flows from financing activities:
Proceeds from receivables sold.................................................... 100,000 --
(Payments of) proceeds from short-term debt....................................... (20,770) 5,741
Payments of long-term debt........................................................ -- (6,667)
Proceeds from sale of convertible subordinated debentures......................... -- 55,250
Proceeds from exercise of stock options........................................... 10 808
----------- ---------
Net cash provided by financing activities..................................... 79,240 55,132
----------- ---------
Net (decrease) increase in cash and cash equivalents.................................. (690) 4,145
Cash and cash equivalents, beginning of the period.................................... 31,410 20,690
Cash and cash equivalents, end of the period.......................................... $ 30,720 24,835
See accompanying notes to consolidated financial statements.
F-19
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 28, 1996. The results of
operations for the thirteen and twenty-six weeks ended June 28, 1997 are not
necessarily indicative of the results for the entire fiscal year ending December
27, 1997.
2. ACCOUNTS RECEIVABLE
The Company has entered into an agreement to sell $200 million of accounts
receivable, with limited recourse, to an unrelated financial institution. The
agreement was initially entered into in June 1995 with respect to $100 million
of accounts receivable and was amended in January 1997 to sell an additional
$100 million of accounts receivable. New qualifying receivables are sold to the
financial institution as collections reduce previously sold receivables in order
to maintain a balance of $200 million sold receivables. On June 27, 1997, $46.6
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. On
June 28, 1997, the interest rate was 6.09%.
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. EARNINGS PER COMMON SHARE
Primary earnings per share of common stock have been computed on the basis
of the weighted average number of shares of common stock outstanding after
giving effect to equivalent common shares from dilutive stock options. Fully
diluted earnings per share further assumes the conversion of the Company's
convertible subordinated debentures for the period they were outstanding.
5. 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.
6. 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):
1997 1996
-------- ------
Interest paid..................................... $ 14,310 $ 9,924
Income taxes paid................................. 7,574 1,126
F-20
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Inacom
has agreed to sell to each of the Underwriters named below, and each of such
Underwriters, for whom Goldman, Sachs & Co., J.P. Morgan Securities Inc. and
PaineWebber Incorporated are acting as representatives, has severally agreed to
purchase from Inacom, the respective number of shares of Common Stock set forth
opposite its name below:
Number of
Shares of
Underwriter Common Stock
------------
Goldman, Sachs & Co.............................
J.P. Morgan Securities Inc. ....................
PaineWebber Incorporated........................
________________________........................ ____________
Total 3,000,000
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares of Common Stock
offered hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement and in part to certain securities
dealers at such price less a concession of $_______ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $_______
per share to certain brokers and dealers. After the shares of Common Stock are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
Inacom has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus Supplement to purchase up to an aggregate of
450,000 additional shares of Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof which the number of shares to be purchased by each
of them, as shown in the foregoing table, bears to the 3,000,000 shares of
Common Stock offered hereby.
Inacom and its directors and executive officers have agreed during the
period beginning from the date of this Prospectus Supplement and continuing to
and including the date 90 days after the date of this Prospectus Supplement, not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities of Inacom that are substantially similar to the shares
of the Common Stock, or any other security convertible into or exchangeable for,
or that represent the right to receive, shares of Common Stock or any such
similar securities, except for (i) shares of Common Stock issuable pursuant to
convertible debt securities, warrants and stock options outstanding on the date
of this Prospectus Supplement, (ii) shares of Common Stock (or securities
convertible or exchangeable in to Common Stock) to be issued solely in
connection with acquisitions, (iii) the shares of Common Stock offered in this
offering and (iv) the Debentures offered in the concurrent Debenture offering
without the prior written consent of the Underwriters. The Company has agreed to
give Goldman, Sachs & Co. prompt notice of any issuance of Common Stock in
private placements in connection with acquisitions and not to register such
Common Stock for sale or resale during the period beginning from the date of
this Prospectus Supplement and continuing to and including the date 90 days
after the date of this Prospectus Supplement.
In connection with this offering, the Underwriters may purchase and
sell Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions in connection with this offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or retarding
a decline in the market price of the Common Stock; and syndicate short positions
involve the sale by the Underwriters of a greater number of shares of Common
Stock than they are required to purchase from the Company in this offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to syndicate members or other broker-dealers in respect of the shares of Common
Stock sold in this offering for their account, may be reclaimed by the syndicate
if such shares of Common Stock are repurchased by the syndicate in stabilizing
or covering transactions. These activities may stabilize, maintain or otherwise
affect the market price of the Common Stock, which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the NYSE or otherwise.
Inacom has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
- ----------------------------------------------------------
- ----------------------------------------------------------
No person has been authorized to give any information or
to make any representations other than those contained in
this Prospectus, and, if given or made, such information
or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any securities
other than the Securities to which it relates, or an offer to
sell or the solicitation of an offer to buy such Securities,
in any circumstance in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances,
create any implication that there has been no change in
the affairs of the Company since the date hereof or that
the information contained herein is correct as of any time
subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
Page
Prospectus Supplement
Prospectus Summary............................ S-3
Risk Factors.................................. S-6
Use of Proceeds............................... S-9
Price Range of Company Stock
and Dividend Policy......................... S-10
Capitalization................................ S-11
Selected Consolidated Financial Data.......... S-12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations............................... S-13
Business.. S-21
Management.................................... S-28
Legal Matters................................. S-30
Experts....................................... S-30
Index to Consolidated Financial
Statements and Financial Statement
Schedule.................................... F-1
Underwriting.................................. U-1
Prospectus
Available Information......................... 2
Incorporation of Certain
Documents By Reference....................... 3
The Company................................... 4
Use of Proceeds............................... 5
Ratios of Earnings to Fixed Charges........... 6
Description of Debt Securities................ 7
Description of Capital Stock.................. 12
Plan of Distribution.......................... 15
Legal Matters................................. 16
Experts....................................... 16
3,000,000
Shares
of
InaCom Corp.
COMMON STOCK
--------------
PROSPECTUS
___________, 1997
-------------
Goldman, Sachs & Co.
J.P. Morgan & Co.
PaineWebber Incorporated
- ----------------------------------------------------------
- ----------------------------------------------------------
SUBJECT TO COMPLETION DATED September 30, 1997
$300,000,000
INACOM CORP.
DEBT SECURITIES
PREFERRED STOCK
COMMON STOCK
InaCom Corp. ("InaCom" or the "Company") may from time to time offer (i)
debt securities ("Debt Securities") consisting of debentures, notes and/or other
evidences of indebtedness, in one or more series, (ii) shares of preferred
stock, par value $1.00 per share ("Preferred Stock"), in one or more series, or
(iii) shares of common stock, par value $.10 per share ("Common Stock"), or any
combination of the foregoing, at an aggregate initial offering price not to
exceed $300,000,000, at prices and on terms to be determined at or prior to the
time of the sale. The Debt Securities, Preferred Stock and Common Stock are
collectively referred to herein as "Securities".
Specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in an accompanying Prospectus Supplement (the
"Prospectus Supplement"), together with the terms of the offering of such
Securities and the initial price and the net proceeds to the Company from their
sale. Without limiting the foregoing, the Prospectus Supplement will set forth
the following: (i) in the case of Debt Securities, the specific designation,
aggregate principal amount, ranking as senior debt or subordinated debt,
authorized denomination, maturity, rate or method of calculation of interest and
dates for payment thereof, nature and terms of any security, any
exchangeability, conversion, redemption, prepayment or sinking fund provisions,
additional covenants or events of default, tax consequences, and the currency or
currencies or currency unit or currency units in which principal, premium, if
any, or interest, if any, is payable; (ii) in the case of Preferred Stock, the
designation, number of shares, liquidation preference per share, dividend rate
(or method of calculation thereof), dates on which dividends, if any, shall be
payable and from which dividends shall accrue, voting rights, if any, any
redemption or sinking fund provisions, and any conversion or exchange rights;
and (iii) in the case of Common Stock, the number of shares.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ICO." Any Common Stock sold pursuant to a Prospectus Supplement will be listed
on the New York Stock Exchange, subject to official notice of issuance. The
Company has not yet determined whether any of the Debt Securities or Preferred
Stock offered hereby will be listed on any exchange or over-the-counter market.
If the Company decides to seek listing of any such Securities, the Prospectus
Supplement relating thereto will disclose such exchange or market.
The Company may sell the Securities directly, through agents, underwriters
or dealers, as designated from time to time, or through a combination of any
such methods. See "Plan of Distribution." If any agents of the Company or any
underwriters or dealers are involved in the sale of the Securities, the names of
such agents, underwriters or dealers and any applicable commissions and
discounts will be set forth in the Prospectus Supplement.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
----------------------
The date of this Prospectus is ______________, 1997.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any state in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
1
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 7 World Trade
Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois
60661-2511. Copies of such material also can be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Reports and other information concerning the
Company can also be inspected at the office of the New York Stock Exchange, 20
Broad Street, New York, New York 10005. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.
The Company has filed a registration statement on Form S-3 (together with
all amendments and exhibits filed or to be filed in connection therewith, the
"Registration Statement") under the Securities Act of 1933 (the "Securities
Act") with respect to the Securities offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. The Registration Statement may be inspected and copied at the public
reference facilities maintained at the addresses set forth in the preceding
paragraph. Statements contained or incorporated by reference herein concerning
the provisions of documents are necessarily summaries of such documents, and
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant
to the Exchange Act are hereby incorporated by reference: (i) Annual Report on
Form 10-K for the fiscal year ended December 28, 1996, (ii) Quarterly Reports on
Form 10-Q for the quarters ended March 29, 1997 and June 28, 1997, (iii) Proxy
Statement for the Annual Meeting of Stockholders held on April 22, 1997 and (iv)
the description of the Common Stock contained in the Company's Registration
Statement on Form 8-A filed on August 26, 1997 pursuant to Section 12 of the
Exchange Act and all amendments thereto and reports filed for the purposes of
updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any and all of the documents
incorporated herein by reference (not including the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to David C. Guenthner,
Chief Financial Officer, InaCom Corp., 10810 Farnam Drive, Omaha, Nebraska
68154, Telephone: (402) 392- 3900.
---------------
2
THE COMPANY
Inacom is a leading single source provider of information technology
products and technology management services designed to enhance the productivity
of information systems, primarily for Fortune 1000 clients. The Company offers a
comprehensive range of value added services to manage the entire information
system life cycle including: (1) needs assessment and technology planning, (2)
technology procurement and configuration, (3) systems integration and systems
management, (4) ongoing systems support and distributed support, and (5) asset
management. Inacom's expertise includes the integration of voice and data
communications. Inacom sells its products and services through a marketing
network of 51 Company-owned business centers throughout the United States that
focus on serving large corporations. The Company also has a network of
approximately 1,000 value added resellers that typically have a regional,
industry, or specific product focus. The Company has international affiliations
in Europe, Asia, Central and South America, the Caribbean, Middle East, Africa,
Canada and Mexico to satisfy the technology management needs of its
multinational clients.
The Company's headquarters are located at 10810 Farnam Drive, Omaha
Nebraska 68154, and its telephone number is (402) 392-3900.
USE OF PROCEEDS
The Company currently anticipates that net proceeds from the sale of
Securities would be used for general corporate purposes, including, but not
limited to payments of outstanding indebtedness, working capital, capital
expenditures, investments and acquisitions. When Securities are offered, the
Prospectus Supplement related thereto will set forth the Company's intended use
for the net proceeds received from the sale of such Securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratios of earnings to fixed charges for
the Company for the periods indicated. There were no shares of Preferred Stock
issued or outstanding during the periods indicated below and therefore the
combined ratio of earnings to fixed charges and preferred dividends would have
been the same as set forth below.
Fiscal Year Ended December Twenty-Six Weeks Ended
1992 1993 1994 1995 1996 June 29, 1996 June 28, 1997
--------------------------------------- ------------- -------------
Ratio of earnings
to fixed charges............ 2.85 2.80 0.75x 2.11 2.30 2.07 2.20
The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income before interest expense, interest
income and income taxes plus fixed charges) by fixed charges. Fixed charges
consist of interest expense (including amortization of deferred financing costs)
and the portion of rental expense that is representative of the interest factor.
For the fiscal year ended December 31, 1994, earnings were insufficient to cover
fixed charges by $3.8 million; for such fiscal year the Company incurred
non-recurring charges of $7.1 million; exclusive of such charges, the ratio of
earnings to fixed charges was 1.23.
DESCRIPTION OF DEBT SECURITIES
The following description of the Debt Securities sets forth certain general
terms and provisions of the Debt Securities to which any Prospectus Supplement
may relate ("Offered Debt Securities"). The particular terms of the Offered Debt
Securities and the extent to which such general provisions may apply will be
described in the Prospectus Supplement relating to such Offered Debt Securities.
The Debt Securities will be general obligations of the Company, and each
series of Offered Debt Securities will constitute either senior debt securities
or subordinated debt securities. In the case of senior debt securities
3
("Senior Debt Securities"), the Debt Securities will be issued under an
indenture dated September 30, 1997 (the "Senior Indenture") between the Company
and Norwest Bank Minnesota, National Association as trustee. In the case of
subordinated debt securities ("Subordinated Debt Securities"), the Debt
Securities will be issued under an indenture September 30, 1997 (the
"Subordinated Indenture") between the Company and Norwest Bank Minnesota,
National Association as trustee. The Senior Indenture and the Subordinated
Indenture are sometimes hereinafter referred to herein individually as an
"Indenture" and collectively as the "Indentures." The trustee under each
Indenture (and any successor thereto under each Indenture) is referred to herein
as the "Trustee." The statements under this caption relating to the Debt
Securities and the Indentures are summaries only and do not purport to be
complete. Such summaries make use of terms defined in the Indentures. Wherever
such terms are used herein or particular provisions of the Indentures are
referred to, such terms or provisions, as the case may be, are incorporated by
reference as part of the statements made herein, and such statements are
qualified in their entirety by such reference. Copies of the Senior Indenture
and the Subordinated Indenture have been filed as exhibits to the Registration
Statement, of which this Prospectus is a part.
Provisions Applicable to Both Senior and Subordinated Debt Securities
General
The Indentures do not limit the aggregate principal amount of Debt
Securities which can be issued thereunder and provide that Debt Securities may
be issued thereunder from time to time in one or more series, each in an
aggregate principal amount authorized by the Company prior to issuance. The
applicable Prospectus Supplement will set forth any limitations on the amount of
other indebtedness or securities which may be issued by the Company.
Reference is made to the Prospectus Supplement relating to the particular
series of Debt Securities offered thereby for the following terms of the Offered
Debt Securities: (i) the title and aggregate principal amount; (ii) the maturity
date or dates; (iii) the interest rate or rates (which may be fixed or variable)
per annum, if any, or the method of determining such rate or rates; (iv) the
date or dates from which such interest, if any, will accrue and the date or
dates on which such interest, if any, will be payable, the date on which payment
of such interest, if any, will commence and the record dates for determining
interest payments, if any; (v) the terms for redemption or early payment, if
any, including any mandatory or optional sinking fund or analogous provision;
(vi) whether such Offered Debt Securities will be secured or unsecured and, if
secured, the nature and terms of the security; (vii) the terms for conversion or
exchange, if any; (viii) the classification as Senior Debt Securities or
Subordinated Debt Securities; (ix) in the case of Offered Debt Securities
offered to foreign investors, whether such Offered Debt Securities will be
issued in fully registered form or in bearer form or any combination thereof;
(x) whether such Offered Debt Securities will be issued in the form of one or
more global securities and whether such global securities are to be issuable in
temporary global form or permanent global form; (xi) if other than U.S. dollars,
the currency or currencies or currency unit or units in which such Offered Debt
Securities will be denominated and in which the principal of, and premium, if
any, and interest, if any, thereon will be payable; (xii) whether, and the terms
and conditions on which, the Company or a holder may elect that, or the other
circumstances under which, payment of principal of, or premium, if any, or
interest, if any, is to be made in a currency or currencies or currency unit or
units other than that in which such Offered Debt Securities are denominated;
(xiii) any Events of Default (as defined below) with respect to the Offered Debt
Securities if not otherwise set forth under "Events of Default" below; (xiv) any
additions to, or changes in, the covenants which apply to the Offered Debt
Securities; (xv) a summary of the tax consequences to holders under United
States laws of owning the Offered Debt Securities, including the possible
imposition of withholding taxes; (xvi) the securities exchange or market, if
any, on which the Offered Debt Securities will be listed; and (xvii) any other
specific terms of the Offered Debt Securities.
Offered Debt Securities may be sold at a discount (which may be
substantial) below their stated principal amount or bear no interest or interest
at a rate which at the time of issuance is below market rates, or both.
4
No service charge will be made to any holder for any registration of
transfer or exchange of the Offered Debt Securities, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
If any of the Offered Debt Securities are sold for any foreign currency or
currency unit or if the principal of, or premium, if any, or interest, if any,
on any of the Offered Debt Securities is payable in any foreign currency or
currency unit, the restrictions, elections, tax consequences, specific terms and
other information with respect to such Offered Debt Securities and such foreign
currency or currency unit will be set forth in the Prospectus Supplement
relating thereto.
Events of Default
Unless otherwise provided in the Prospectus Supplement with respect to any
series of Offered Debt Securities, the following are "Events of Default" under
each Indenture with respect to each series of Debt Securities issued under such
Indenture: (a) failure for 30 days to pay any interest on any Debt Security of
such series when due; (b) failure to pay principal of (or premium, if any, on)
any Debt Security of such series when due; (c) failure for 60 days to deposit
any mandatory sinking fund payment, when due, in respect of the Debt Securities
of such series; (d) failure for 90 days after written notice as provided in the
Indenture to perform any other covenant of the Company in the Indenture (other
than covenants described in clauses (a), (b) or (c) above); (e) failure to pay
when due any payment on, or the acceleration of, Indebtedness (as defined below)
under any mortgages, indentures (including the Indenture) or instruments under
which the Company may have issued, or under which there may have been secured or
evidenced, any indebtedness for money borrowed by the Company aggregating in
excess of $5 million, if such Indebtedness is not discharged or such
acceleration is not annulled within 30 days after written notice as provided in
the Indenture; (f) certain events of bankruptcy, insolvency or reorganization;
and (g) any other Event of Default as may be specified in the Prospectus
Supplement with respect to the Offered Debt Securities. If an Event of Default
with respect to any outstanding series of Debt Securities occurs and is
continuing, either the Trustee or the holders of at least 25% in principal
amount of the outstanding Debt Securities of such series (in the case of an
Event of Default described in clause (a), (b), (c) or (d) above) or at least 25%
in principal amount of all outstanding Debt Securities under the applicable
Indenture (in the case of other Events of Default) may declare the principal
amount and all accrued but unpaid interest of all the Debt Securities of the
applicable series (or of all outstanding Debt Securities under the applicable
Indenture, as the case may be) to be due and payable immediately. At any time
after a declaration of acceleration with respect to Debt Securities of any
series (or of all outstanding Debt Securities under the applicable Indenture, as
the case may be) has been made, but before a judgment or decree for payment of
money has been obtained, the holders of a majority in principal amount of the
outstanding Debt Securities of such series (or of all outstanding Debt
Securities under the applicable Indenture, as the case may be) may, under
certain circumstances, rescind and annul such acceleration. Depending on the
terms of other Indebtedness of the Company outstanding from time to time, an
Event of Default under an Indenture may give rise to cross defaults on such
other indebtedness of the Company.
Each Indenture provides that the Trustee will, within 90 days after the
occurrence of a default in respect of any series of Debt Securities, give to the
holders of the Debt Securities of such series notice of all unsecured and
unwaived defaults known to it; provided, however, that except in the case of a
default in the payment of the principal of, or premium, if any, or interest, if
any, on or any sinking fund installment with respect to, any Debt Securities of
such series, the Trustee will be protected in withholding such notice if it in
good faith determines that the withholding of such notice is in the best
interest of the holders of the Debt Securities of such series. For the purpose
of this provision, "default" with respect to Debt Securities of any series means
any event which is, or after notice or lapse of time or both would become, an
Event of Default with respect to the Debt Securities of such series.
The holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the applicable Indenture) have the right, subject to certain limitations,
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or
5
exercising any trust or power conferred on the Trustee with respect to the Debt
Securities of such series (or of all outstanding Debt Securities under the
applicable Indenture). Each Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee shall exercise such of its rights and
powers under the applicable Indenture and use the same degree of care and skill
in its exercise as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers the
applicable Indenture at the request of any of the holders of the Debt Securities
unless they shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request.
The holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the applicable Indenture) may, on behalf of the holders of all Debt
Securities of such series (or of all outstanding Debt Securities under the
applicable Indenture), waive any past default under the applicable Indenture,
except a default in the payment of the principal of, or premium, if any, or
interest, if any, on, any Debt Security of such series (or of all outstanding
Debt Securities under the applicable Indenture) or in respect of a provision
which under the applicable Indenture cannot be modified or amended without the
consent of the holder of each outstanding Debt Security affected. The holders of
a majority in principal amount of the outstanding Debt Securities affected
thereby may, on behalf of the holders of all such Debt Securities, waive
compliance by the Company with certain restrictive provisions of the Indentures.
The Company is required to furnish to the Trustee annually a statement as
to the performance by the Company of certain of its obligations under each
Indenture and as to any default in such performance.
Modification of Indentures
The Company and the Trustee may, with the consent of the holders of a
majority in principal amount of all series of outstanding Debt Securities under
the Indenture affected thereby, enter into supplemental indentures for the
purpose of amending or modifying, in any manner, provisions of such Indenture or
any supplemental indenture modifying the rights of holders of such series of
Debt Securities; provided, however, that no such supplemental indenture, without
the consent of the holder of each outstanding Debt Security affected thereby,
shall, among other things, (a) change the stated maturity date of the principal
of, or any installment of interest on, any Debt Security, (b) reduce the
principal amount of, or the premium, if any, or interest, if any, on any Debt
Security, (c) change the place or currency or currencies or currency unit or
units of payments of principal of, or premium, if any, or interest, if any, on,
any Debt Security, (d) impair the right to institute suit for the enforcement of
any payment on or with respect to any Debt Securities or (e) reduce the
percentage in principal amount of outstanding Debt Securities the consent of
whose holders is required for execution of any such supplemental indenture or
for waiver of compliance with certain provisions of such Indenture or for waiver
of certain defaults.
Each Indenture provides that the Company and the Trustee may, without the
consent of any holders of Debt Securities, enter into supplemental indentures
for the purposes, among other things, of (a) adding to the Company's covenants,
(b) adding additional Events of Default, (c) establishing the form or terms of
Debt Securities or (d) curing ambiguities or inconsistencies in the applicable
Indenture, any supplemental indenture or in the Debt Securities of any series,
provided such action to cure ambiguities or inconsistencies shall not adversely
affect the interests of the holders of the Debt Securities in any material
respect.
Consolidation, Merger and Sale of Assets
The Company may not consolidate with or merge into, or convey transfer or
lease its assets substantially as an entirety to, any person, unless (a) the
person formed by such consolidation or into which the Company is merged or which
acquires or leases the assets of the Company substantially as an entirety is a
corporation, partnership, limited liability company or trust organized under the
laws of any United States jurisdiction, (b) the person formed by such
consolidation or into which the Company is merged or which acquires or leases
the assets
6
of the Company substantially as an entirety assumes by supplemental indenture
the Company's obligations in respect of the Debt Securities and under the
Indentures, (c) after giving effect to the transaction, no Event of Default, and
no event which, after notice or lapse of time or both, would become an Event of
Default, shall have occurred and be continuing, and (d) certain other conditions
are met. Upon compliance with these provisions by a successor person, the
Company will (except in the case of a lease) be relieved of its obligations
under the Indentures and the Debt Securities.
Other Covenants
The Prospectus Supplement relating to the Offered Debt Securities will
describe other specific affirmative and negative covenants, if any, from which
the Offered Debt Securities will benefit. The Company may covenant, among other
things, to deliver to holders of the Offered Debt Securities reports filed by
the Company pursuant to the Exchange Act and to execute additional instruments
necessary to fulfill its obligations under the Indenture and the Offered Debt
Securities. Each Indenture or indenture supplement thereto may also impose
restrictions on indebtedness, guarantees, issuance of preferred stock, liens,
investments, acquisitions, dividend payments and/or transactions with
affiliates. Unless otherwise indicated in a Prospectus Supplement, the Debt
Securities will not benefit from any covenant or other provision that would
afford holders of such Debt Securities special protection in the event of a
highly leveraged transaction or change of control involving the Company.
Discharge and Defeasance
The Company may satisfy and discharge its obligations under each Indenture,
other than its obligation to pay the principal of, and premium, if any, and
interest, if any, on, the Debt Securities of any series and certain other
obligations, if it (i) irrevocably deposits or causes to be irrevocably
deposited with the Trustee as trust funds, an amount, in money or U.S.
government obligations maturing as to principal and interest, sufficient to pay
the principal of, and premium, if any, and interest, if any, on, and any
mandatory sinking funds in respect of, all outstanding Debt Securities of such
series on the stated maturity date of such payments or on any redemption date
and (ii) complies with any additional conditions specified to be applicable with
respect to the covenant defeasance of Debt Securities of such series.
The terms of any series of Debt Securities may also provide for legal
defeasance pursuant to each Indenture. In such case, if the Company (i)
irrevocably deposits or causes to be irrevocably deposited money or U.S.
government obligations as described above, (ii) makes a request to the Trustee
to be discharged from its obligations on the Debt Securities of such series and
(iii) complies with any additional conditions specified to be applicable with
respect to legal defeasance of Debt Securities of such series, the Company shall
be deemed to have paid and discharged the entire indebtedness on all the
outstanding Debt Securities of such series, and the obligations of the Company
under the applicable Indenture and the Debt Securities of such series to pay the
principal of, and premium, if any, and interest, if any, on, the Debt Securities
of such series shall cease, terminate and be completely discharged, and the
holders thereof shall thereafter be entitled only to payment out of the money or
U.S. government obligations so deposited with the Trustee, unless the Company's
obligations are revived and reinstated because the Trustee is unable to apply
such trust fund by reason of any legal proceeding, order or judgment.
Form, Exchange, Registration and Transfer
Each Debt Security will be represented by either a global security (a
"Global Debt Security") registered in the name of The Depository Trust Company
(the "Depositary") or a nominee of the Depositary (each such Debt Security
represented by a Global Debt Security being herein referred to as a "Book-Entry
Debt Security") or a certificate issued in definitive registered form (a
"Certificated Debt Security"), as set forth in the applicable Prospectus
Supplement. Except as set forth below, Book-Entry Debt Securities will not be
issuable in certificated form.
7
Certificated Debt Securities may be transferred or exchanged at the
Trustee's office or paying agencies in accordance with the terms of the
Indenture. No service charge will be made to any holder for any transfer or
exchange of Certificated Debt Securities, but the Company may require payment of
a sum sufficient to cover any tax or other governmental charge payable in
connection therewith. Certificated Debt Securities will not be exchangeable for
Book-Entry Debt Securities.
The transfer of Certificated Debt Securities and the right to the principal
of, and premium, if any, and interest, if any, on, such Certificated Debt
Securities may be effected only by surrender of the old certificate representing
such Certificated Debt Securities and either reissuance by the Company or the
Trustee of the old certificate to the new holder or the issuance by the Company
or the Trustee of a new certificate to the new holder.
Each Global Debt Security representing Book-Entry Debt Securities will be
deposited with, or on behalf of, the Depositary and registered in the name of
the Depositary or a nominee of the Depositary. Except as set forth below,
Book-Entry Debt Securities will not be exchangeable for Certificated Debt
Securities and will not otherwise be issuable as Certificated Debt Securities.
Ownership of beneficial interests in Book-Entry Debt Securities will be
limited to persons that have accounts with the Depositary for the related Global
Debt Security ("Participants") or persons that may hold interests through
Participants. Upon deposit of a Global Debt Security, the Depositary will
credit, on its book-entry registration and transfer system, the Participants'
accounts with the respective principal amounts of the Book-Entry Debt Securities
represented by such Global Debt Security beneficially owned by such
Participants. The accounts to be credited shall be designated by any dealers,
underwriters or agents participating in the distribution of such Book-Entry Debt
Securities. Ownership of Book-Entry Debt Securities will be shown on, and the
transfer of such ownership interests will be effected only through, records
maintained by the Depositary for the related Global Debt Security (with respect
to interests of Participants) and on the records of Participants (with respect
to interests of persons holding through Participants). The laws of some states
may require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the ability
to own, transfer or pledge beneficial interests in Book-Entry Debt Securities.
So long as the Depositary for a Global Debt Security, or its nominee, is
the registered owner of such Global Debt Security, the Depositary or such
nominee, as the case may be, will be considered the sole owner or holder of the
Book-Entry Debt Securities represented by such Global Debt Security for all
purposes under the Indenture. Except as set forth below, owners of beneficial
interests in Book-Entry Debt Securities will not be entitled to have such
securities registered in their names, will not receive or be entitled to receive
physical delivery of a certificate in definitive form representing such
securities and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, approvals or instructions to the Trustee thereunder. As a result,
the ability of a person having a beneficial interest in Book-Entry Debt
Securities represented by a Global Debt Security to pledge such interest to
persons or entities that do not participate in the Depositary's system, or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest. Accordingly, each
person owning Book-Entry Debt Securities must rely on the procedures of the
Depositary for the related Global Debt Security and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder under the Indenture.
The Company understands that, under existing industry practice, if the
Company requests any action of holders, or an owner of a beneficial interest in
a Global Debt Security desires to give any notice or take any action a holder is
entitled to give or take under the Indenture, the Depositary will authorize the
Participants on whose behalf it holds a Global Debt Security to give such notice
or take such action, and Participants will authorize beneficial owners owning
through such Participant to give such notice or take such action or will
otherwise act upon the instructions of beneficial owners owning through them.
The Indentures provide that the Company, the Trustee and their respective agents
will treat as the holder of a Debt Security the persons specified in a written
statement
8
of the Depositary with respect to such Global Debt Security for purposes of
obtaining any consents or directions required to be given by holders of the Debt
Securities pursuant to the Indentures.
Payments of principal of, and premium, if any, and interest, if any, on,
Book-Entry Debt Securities will be made by the Trustee to the Depositary or its
nominee, as the case may be, as the registered holder of the related Global Debt
Security. Under the terms of the Indentures, the Company and the Trustee may
treat the persons in whose names the Offered Debt Securities, including the
Global Debt Security, are registered as the owners thereof for the purpose of
receiving such payments and for any and all other purposes whatsoever.
Consequently, none of the Company, the Trustee or any other agent of the Company
or any agent of the Trust will have any responsibility or liability for any
aspect of the records relating to, or payments made on account of any beneficial
ownership interest in, such Global Debt Security or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
The Company expects that the Depositary, upon receipt of any payment of
principal of, or premium, if any, or interest, if any, on a Global Debt
Security, will immediately credit Participants' accounts with payments in
amounts proportionate to the respective amounts of Book-Entry Debt Securities
held by each such Participant as shown on the records of such Depositary. The
Company also expects that payments by Participants to owners of beneficial
interests in Book-Entry Debt Securities held through such Participants will be
governed by standing customer instructions and customary practices, as is now
the case with the securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of the
Participants.
If (i) the Depositary is at any time unwilling or unable to continue as
Depositary or ceases to be a clearing agency registered under the Exchange Act,
and a successor depositary registered as a clearing agency under the Exchange
Act is not appointed by the Company within 90 days, (ii) the Company, at its
option, notifies the Trustee that it elects to cause the issuance of
Certificated Debt Securities under an Indenture or (iii) there shall be an Event
of Default with respect to the Debt Securities represented by the Global Debt
Security, then, upon surrender by the Depositary of the Global Debt Security,
Certificated Debt Securities will be issued to each person that the Depositary
identifies as the beneficial owner of the Book-Entry Debt Securities represented
by the Global Debt Security.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or any person that may hold interests through a
Participant in identifying the beneficial owners of the Book-Entry Debt
Securities, and the Company and the Trustee may conclusively rely on, and shall
be protected in relying on, instructions from the Depositary for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Book-Entry Debt Securities to be issued).
The foregoing information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company takes no responsibility for the accuracy of
such information or the performance by the Depositary or its Participants of
their respective obligations as described hereunder or under the rules and
procedures governing their respective operations.
Each Indenture requires that payments in respect to the Book-Entry Debt
Securities represented by a Global Debt Security (including principal, premium,
if any, and interest, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Depositary. With respect to Offered Debt
Securities represented by Certificated Debt Securities, the Company will make
all payments of principal, premium, if any, and interest, if any, by mailing a
check to each such holder's registered address.
9
The Trustee
Each Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions,
except that, if it acquires any conflicting interest (as defined), it must
eliminate such conflict or resign. The Trustee may also be a trustee under other
indentures of the Company under which outstanding senior or subordinated debt
securities of the Company have been issued.
Norwest Bank Minnesota, National Association is the Trustee under each
Indenture and is one of a number of banks with which Inacom maintains banking
relationships.
Provisions Applicable Solely to Senior Debt Securities
Senior Debt Securities will be issued under the Senior Indenture and will
rank pari passu with all other Senior Indebtedness (as defined below) of the
Company.
Provisions Applicable Solely to Subordinated Debt Securities
General
Subordinated Debt Securities will be issued under the Subordinated
Indenture and will rank pari passu with certain other subordinated debt of the
Company that may be outstanding from time to time and junior to all Senior
Indebtedness (as defined below) of the Company (including any Senior Debt
Securities) that may be outstanding from time to time.
Subordination
The payment of the principal of, and premium, if any, and interest, if any,
on the Subordinated Debt Securities is expressly subordinated, to the extent and
in the manner set forth in the Subordinated Indenture, in right of payment to
the prior payment in full of all Senior Indebtedness of the Company.
In the event of any dissolution or winding up or total or partial
liquidation or reorganization of the Company, whether in bankruptcy,
reorganization, insolvency, receivership or similar proceeding, the holders of
Senior Indebtedness will be entitled to receive payment in full of all amounts
due or to become due on or in respect of all Senior Indebtedness before the
holders of the Subordinated Debt Securities are entitled to receive any payment
on account of principal of, or premium, if any, or interest, if any, on, the
Subordinated Debt Securities.
Except as provided pursuant to a supplemental indenture or a board
resolution of the Company, no payment in respect of the Debentures will be made
if, at the time of such payment, there exists a default in payment of all or any
portion of any Senior Indebtedness, and such default has not been cured or
waived in writing or the benefits of this sentence waived in writing by or on
behalf of the holders of such Senior Indebtedness. In addition, during the
continuation of any event of default (other than a default referred to in the
immediately preceding sentence) with respect to any Senior Indebtedness
permitting the holders to accelerate the maturity thereof and upon written
notice thereof given to the Trustee, with a copy to the Company, by any holder
of such Senior Indebtedness or its representative, then, unless and until such
an event of default has been cured or waived or has ceased to exist, no payment
will be made by the Company with respect to the principal of or interest on the
Debentures or to acquire any of the Debentures or on account of the redemption
provisions for the Debentures; provided, however, that if the holders of the
Senior Indebtedness to which the default relates have not declared such Senior
indebtedness to be immediately due and payable within 90 days after the
occurrence of such default (or have declared such Senior Indebtedness to be
immediately due and payable and within such period rescind such declaration of
acceleration),
10
then the Company will resume making any and all required payments in respect of
the Debentures (including any missed payments). Only one payment blockage period
under the immediately preceding sentence may be commenced within any consecutive
270-day period with respect to the Debentures. No event of default which existed
or was continuing on the date of the commencement of any 90-day payment blockage
period with respect to the Senior Indebtedness initiating such payment blockage
period will be made the basis for the commencement of a second payment blockage
period by a Holder or representative of such Senior Indebtedness whether or not
within a period of 270 consecutive days unless such event of default has been
cured or waived for a period of not less than 90 consecutive days (and, in the
case of any such waiver, no payment will be made by the Company to the holders
of Senior Indebtedness in connection with such waiver other than amounts due
pursuant to the terms of the Senior Indebtedness as in effect at the time of
such default).
The term "Senior Indebtedness" is defined in the Indenture as Indebtedness
(as defined below) of the Company outstanding at any time except Indebtedness
that by its terms is subordinate in right of payment to the Subordinated Debt
Securities or Indebtedness that is not otherwise senior in right of payment to
the Subordinated Debt Securities. Senior Indebtedness does not include
Indebtedness of the Company to any of its subsidiaries. Indebtedness is defined
with respect to any person as the principal of, and premium, if any, and
interest on (a) all indebtedness of such person for borrowed money (including
all indebtedness evidenced by notes, bonds, debentures or other securities sold
by such person for money), (b) all indebtedness incurred by such person in the
acquisition (whether by way of purchase, merger, consolidation or otherwise and
whether by such person or another person) of any business, real property or
other assets (except assets acquired in the ordinary course of the conduct of
the acquiror's usual business), (c) guarantees by such person of indebtedness
described in clause (a) or (b) of any other person, (d) all renewals,
extensions, refundings, deferrals, restructurings, amendments and modifications
of any such indebtedness, obligation or guarantee (e) all reimbursement
obligations of such person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such person, (f) all
capital lease obligations of such person, and (g) all net obligations of such
person under interest rate swap or similar agreements of such person. There are
no restrictions in the Subordinated Indenture upon the creation of additional
Senior Indebtedness by the Company, or on the creation of any indebtedness by
the Company or any of its subsidiaries.
If Subordinated Debt Securities are issued under the Subordinated
Indenture, the aggregate principal amount of Senior Indebtedness outstanding as
of a recent date will be set forth in the applicable Prospectus Supplement. The
applicable Prospectus Supplement will also set forth any limitation on the
issuance by the Company of any additional Senior Indebtedness.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.10 per share, and 1,000,000 shares of Preferred
Stock, par value $1.00 per share. As of September 26, 1997, there were
11,537,315 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
On June 15, 1996, InaCom issued $55,250,000 in aggregate principal amount
of its 6% Convertible Subordinated Debentures due June 15, 2006 (the
"Debentures"). The Debentures are convertible at the option of the holder into
Common Stock at a conversion price of $24.00 per share; an aggregate of
2,302,084 shares of Common Stock would be issued if all Debentures were
converted into Common Stock.
Common Stock
Holders of outstanding Common Stock are entitled to such dividends as may
be declared by the Company Board of Directors out of the assets legally
available for that purpose, and are entitled to one vote per share on all
matters submitted to a vote of the stockholders of the Company. The holders of
shares of Common Stock do not have cumulative voting rights. Therefore, the
holders of more than 50% of the Common Stock voting for the election of
directors can elect all the directors, and the remaining holders will not be
able to elect any directors.
11
The holders of Common Stock have no pre-emptive or other subscription rights,
and there are no conversion or redemption or sinking fund provisions with
respect to such shares.
All of the outstanding shares of Common Stock will be, when issued upon
conversion of the Debt Securities, duly authorized, validly issued, fully paid
and nonassessable.
Preferred Stock
The Company Board of Directors is authorized to issue up to 1,000,000
shares of Preferred Stock in one or more series, from time to time, with such
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations and restrictions thereof, as may be
provided in a resolution or resolutions adopted by the Company Board of
Directors. The authority of the Company Board of Directors includes, but is not
limited to, the determination or fixing of the following with respect to shares
of such class or any series thereof: (i) the number of shares; (ii) the dividend
rate and the date from which dividends are to be cumulative; (iii) whether
shares are to be redeemable and, if so, the terms and amount of any sinking fund
providing for the purchase or redemption of such shares; (iv) whether shares
shall be convertible, and, if so, the terms and provisions thereof; (v) what
restrictions are to apply, if any, on the issue or reissue of any additional
Preferred Stock; and (vi) whether such shares have voting rights. Shares of
Preferred Stock may be issued with a preference over the Common Stock as to the
payment of dividends. No shares of Preferred Stock have been issued.
The description of Preferred Stock herein and the description of the terms
of a particular series of Preferred Stock that will be set forth in a Prospectus
Supplement do not purport to be complete and are qualified in their entirety by
reference to the certificate of designation, preferences and rights relating to
such series.
Classes of stock such as the Preferred Stock may be used, in certain
circumstances, to create voting impediments on extraordinary corporate
transactions or to frustrate persons seeking to effect a merger or otherwise to
gain control of the Company. For the foregoing reasons, any shares of Preferred
Stock issued by the Company could have an adverse effect on the rights of the
holders of the Common Stock. The Company has no present plans to issue any
shares of Preferred Stock.
Liquidation and Other Rights
Upon liquidation, the holders of Common Stock are entitled to share ratably
in assets available for distribution to stockholders after satisfaction of any
liquidation preferences of any outstanding preferred stock. The issuance of any
shares of series of Preferred Stock in future financings, acquisitions or
otherwise may result in dilution of voting power and relative equity interest of
the holders of shares of Common Stock and will subject the Common Stock to the
prior dividend and liquidation rights of the outstanding shares of the series of
Preferred Stock.
Advance Notice Requirements in Connection with Stockholder Meetings
The Company bylaws establish an advance notice procedure for bringing
business before an annual meeting of stockholders and for nominating (other than
by or at the direction of the Board of Directors) candidates for election as
directors at a meeting of stockholders. To be timely, notice of business to be
brought before an annual meeting or nominations of candidates for election of
directors at a meeting must be received by the Secretary of the Company not less
than 60 nor more than 90 days prior to the meeting. In the event that less than
40 days' notice or prior public disclosure of the date is given or made to the
stockholders, notice by the stockholder must be received no later than the tenth
day following the date on which notice of the date of the meeting was mailed or
public disclosure thereof was made.
12
Section 203 of the Delaware General Corporation Law
Section 203 of the General Corporation Law of the Delaware prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless
upon consummation of such transaction the interested stockholder owned 85% of
the voting stock of the corporation outstanding at the time the transaction
commenced or unless the business combination is, or the transaction in which
such person became interested stockholder was, approved in a prescribed manner.
A "business combination" includes a merger, an asset sale and any other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns 15% or more of the corporation's voting stock.
Transfer Agent
The transfer agent for the Common Stock is The First Chicago Trust Company
of New York.
13
PLAN OF DISTRIBUTION
The Company may offer the Securities directly to purchasers, to or through
underwriters, through dealers or agents or through a combination of any such
methods. Any such underwriter(s), dealer(s) or agent(s) involved in the offer
and sale of the Securities in respect of which this Prospectus is delivered will
be named in a Prospectus Supplement. The Prospectus Supplement with respect to
such Securities also will set forth the terms of the offering of such
Securities, including the purchase price of such Securities and the proceeds to
the Company from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers and any
securities exchanges or markets on which such Securities may be listed.
If underwriters are used in an offering of Securities, the Company will
execute an underwriting agreement with such underwriters, and the name of each
underwriter and the terms of the transaction, including any underwriting
discounts and other items constituting compensation of the underwriters and
dealers, if any, will be set forth in the Prospectus Supplement relating to such
offering, and, if an underwriting syndicate is used, the managing underwriter or
underwriters will be set forth on the cover of such Prospectus Supplement. Such
Securities will be acquired by the underwriters for their own accounts and may
be resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers may be changed from time to
time.
If a dealer is used in an offering of Securities, the Company will sell
such Securities to the dealer, as principal. The dealer then may resell such
Securities to the public at varying prices to be determined by such dealer at
the time of resale. The name of the dealer and the terms of the transaction will
be set forth in the Prospectus Supplement relating thereto.
If an agent is used in an offering of Securities, the agent will be named,
and the terms of the agency will be set forth, in the Prospectus Supplement
relating thereto. Unless otherwise indicated in such Prospectus Supplement, an
agent will act on a best efforts basis for the period of its appointment.
Dealers and agents named in a Prospectus Supplement may be deemed to be
underwriters (within the meaning of the Securities Act) of the Securities
described therein. Underwriters, dealers and agents, under underwriting
agreements and other agreements which may be entered into with the Company, may
be entitled to indemnification by the Company against certain liabilities,
including liabilities under the Securities Act.
Offers to purchase Securities may be solicited, and sales thereof may be
made, by the Company directly to institutional investors or others, who may be
deemed to be underwriters within the meaning of the Securities Act with respect
to any resales thereof. The terms of any such offer will be set forth in the
Prospectus Supplement relating thereto.
If so indicated in the Prospectus Supplement, the Company will authorize
underwriters, dealers or other agents of the Company to solicit offers by
certain institutional investors to purchase Securities from the Company pursuant
to contracts providing for payment and delivery at a future date. Institutional
investors with which such contracts may be made include commercial and savings
banks, insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such purchasers must be
approved by the Company. The obligations of any purchaser under any such
contract will not be subject to any conditions except that (i) the purchase of
the Securities shall not at the time of delivery be prohibited under the laws of
any jurisdiction to which such purchaser is subject and (ii) if the Securities
also are being sold to underwriters, the Company shall have sold to such
underwriters the Securities not subject to delayed delivery. Underwriters and
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
14
The anticipated date of delivery of the Securities will be set forth in the
Prospectus Supplement relating to each applicable offering.
There can be no assurance that a secondary market will be created for the
Debt Securities or the Preferred Stock or, if it is created, that it will
continue.
Certain underwriters, dealers or agents and their associates may engage in
transactions with, and perform services for, the Company in the ordinary course
of business, including refinancing of the Company's indebtedness.
To facilitate an offering of a series of Securities, certain persons
participating in the offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Securities. This may include
over-allotments or short sales of the Securities, which involves the sale by
persons participating in the offering of more Securities than have been sold to
them by the Company. In such circumstances, such persons would cover such
over-allotments or short positions by purchasing in the open market or by
exercising the over-allotment option granted to such persons. In addition, such
persons may stabilize or maintain the price of the Securities by bidding for or
purchasing Securities in the open market or by imposing penalty bids, whereby
selling concessions allowed to dealers participating in any such offering may be
reclaimed if Securities sold by them are repurchased in connection with
stabilization transactions. The effect of these transactions may be to stabilize
or maintain the market price of the Securities at a level above that which might
otherwise prevail in the open market. Such transactions, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by McGrath, North, Mullin & Kratz, P.C., Omaha, Nebraska 68102.
EXPERTS
The consolidated financial statements and schedule of InaCom Corp. as of
December 28, 1996 and December 30, 1995, and for each of the years in the
three-year period ended December 28, 1996, have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
15
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the sale and distribution of the Securities being registered. All of the
amounts shown are estimated except the registration fees of the Commission and
the NYSE.
==========================================================================
Item Amount to be paid by
Company
- --------------------------------------------------------------------------
SEC registration fee $ 90,909
- --------------------------------------------------------------------------
NYSE filing fee for common stock $ 100,000
- --------------------------------------------------------------------------
Trustee Fees and Expenses $ 35,000
- --------------------------------------------------------------------------
Printing and engraving expenses $ 100,000
- --------------------------------------------------------------------------
Accounting fees and expenses $ 80,000
- --------------------------------------------------------------------------
Legal fees and expenses $ 60,000
- --------------------------------------------------------------------------
Blue Sky fees and expenses $ 10,000
- --------------------------------------------------------------------------
NASD fee $ 15,500
- --------------------------------------------------------------------------
Miscellaneous $ 3,591
- --------------------------------------------------------------------------
Total $ 495,000
==========================================================================
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Item 15. Indemnification of Directors and Officers.
Pursuant to Article VII of the Certificate of Incorporation of InaCom,
InaCom shall, to the extent required, and may, to the extent permitted by
Section 102 and Section 145 of the General Corporation Law of the State of
Delaware, indemnify and reimburse all persons whom it may indemnify and
reimburse pursuant thereto. No director shall be liable to InaCom or its
stockholders for monetary damages for breach of fiduciary duty as a director
with respect to acts or omissions occurring on or after May 27, 1987. A director
shall continue to be liable for (i) any breach of a director's duty of loyalty
to InaCom or its stockholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) paying a
dividend or approving a stock repurchase which would violate Section 174 of the
General Corporation Law of the State of Delaware; or (iv) any transaction from
which the director derived an improper personal benefit.
The by-laws of InaCom provide for indemnification of InaCom's officers and
directors against all expenses, liabilities or losses reasonably incurred or
suffered by them, including liability arising under the Securities Act of 1933,
to the extent legally permissible under section 145 of the General Corporation
Law of the State of Delaware where any such person was, is, or is threatened to
be made a party to or is involved in any action, suit or proceeding whether
civil, criminal, administrative or investigative, by reason of the fact such
person was serving InaCom in such capacity. Generally, under Delaware law,
indemnification may only be available where an officer or director can establish
that such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of InaCom.
InaCom has purchased directors' and officers' liability insurance covering
certain liabilities incurred by its officers and directors and those of its
subsidiaries and affiliates in connection with the performance of their duties.
Item 16. Exhibits.
Exhibit 1.1 Form of Underwriting Agreement (Debt)
1.2 Form of Underwriting Agreement (Equity)
4.1 Specimen Common Stock Certificate incorporated by reference
from Exhibit 1 of the Company's Registration Statement on
Form 8-A filed August 26, 1997
4.2 Indenture dated September 30, 1997 by and between the Company
and Norwest Bank Minnesota, National Association, as trustee
(Senior Debt)
4.3 Indenture dated September 30, 1997 by and between the Company
and Norwest Bank Minnesota, National Association, as trustee
and Form of First Supplemental Indenture thereto
(Subordinated Debt)
4.4 Restated Certificate of Incorporation of the Company, as
amended, incorporated herein by reference from the Company's
Current Report on Form 8-K dated March 30, 1993
4.5 Bylaws of the Company, as amended to date, incorporated
herein by reference from the Company's Quarterly Report on
Form 10-Q for the quarter ended September 28, 1996
5.1 Opinion of McGrath, North, Mullin & Kratz, P.C.
12 Statement re Computation of Ratios
23.1 Consent of KPMG Peat Marwick LLP
II-2
23.2 Consent of McGrath, North, Mullin & Kratz, P.C.
(included in Exhibit 5.1)
24 Powers of Attorney
25 Statement of Eligibility of Trustee
Item 17. Undertakings.
The undersigned registrant ("Registrant") hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus, any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in this Registration Statement.
(2) To remove from registration by means of a post-effective
amendment, any of the Securities being registered which remain unsold at the
termination of the offering.
(3) That, for purposes of determining any liability under the
Securities Act of 1933 (the "Securities Act"), each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration statement
relating to the Securities offered therein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to written agreements, Bylaw provisions, the Delaware
Corporation Law, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such
II-3
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
4. The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustees to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b) (2) of
the Securities Act.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, InaCom Corp., a Delaware corporation, certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-3 and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Omaha,
State of Nebraska, on the 29th day of September, 1997.
INACOM CORP.
/s/ Bill L. Fairfield
By:_____________________________
Bill L. Fairfield, President
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been signed below by the following persons in the
capacities indicated on the 29th day of September, 1997.
Signature Title
/s/ Bill L. Fairfield
_____________________________________ President and Director (Principal
Bill L. Fairfield Executive Officer)
President and Director
/s/ David C. Guenthner
_____________________________________ Executive Vice President
David C. Guenthner and Chief Financial Officer
Executive Vice President (Principal Financial
Accounting Officer)
Joseph Auerbach* Director
Mogens C. Bay* Director
James Q. Crowe* Director
W. Grant Gregory* Director
Joseph Inatome* Director
Rick Inatome* Director
Gary Schwendiman* Director
Linda S. Wilson* Director
* Bill L. Fairfield, by signing his name hereto, signs the
Registration Statement on behalf of each of the persons indicated. A
Power-of-Attorney authorizing Bill L. Fairfield to sign this Registration
Statement on behalf of each of the indicated Directors of InaCom Corp. is filed
herewith as Exhibit 24.
Bill L. Fairfield
By:________________________
Bill L. Fairfield
Attorney-in-Fact
II-5
EXHIBIT INDEX
Exhibit Description
1.1 Form of Underwriting Agreement (Debt)
1.2 Form of Underwriting Agreement (Equity)
4.1 Specimen Common Stock Certificate incorporated by reference
from Exhibit 1 of the Company's Registration Statement on Form
8-A dated August 26, 1997
4.2 Indenture dated September 30, 1997 by and between the Company
and Norwest Bank Minnesota, National Association, as trustee
(Senior Debt)
4.3 Indenture dated September 30, 1997 by and between the Company
and Norwest Bank Minnesota, National Association, as trustee
and Form of First Supplemental Indenture thereto (Subordinated
Debt)
4.4 Restated Certificate of Incorporation of the Company, as
amended, incorporated herein by reference from the Company's
Current Report on Form 8-K dated March 30, 1993
4.5 Bylaws of the Company, as amended to date, incorporated herein
by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 28, 1996
5.1 Opinion of McGrath, North, Mullin & Kratz, P.C.
12 Statement re Computation of Ratios
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of McGrath, North, Mullin & Kratz, P.C.
(included in Exhibit 5.1)
24 Powers of Attorney
25 Statement of Eligibility of Trustee
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II-6