SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 4, 1997
Date of Report (Date of earliest event reported)
InaCom Corp.
(Exact name of registrant as specified in its charter)
Delaware 0-16114 47-0681813
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
10810 Farnam Drive, Suite 200, Omaha Nebraska 68154
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(402) 392-3900
Item 5. OTHER EVENTS.
On November 4, 1997, InaCom Corp. (the "Company" or "Inacom") completed
the issuance and sale of 3,000,000 shares of common stock, par value $.10 per
share, and $75,000,000 of 4.50% Subordinated Convertible Debentures due November
1, 2004. The Debentures are convertible at any time into common stock at a
conversion rate of 25.2350 shares of common stock for each $1,000 principal
amount of the debentures (equivalent to a conversion price of $39.63 per share).
The net proceeds from the offering were approximately $165.7 million. Inacom has
granted the underwriters an over-allotment option for a period of up to 30 days
to purchase an additional 450,000 shares of common stock and up to $11.25
million of subordinated convertible debt.
The descriptions of the Company below 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
"Business Factors" below. 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.
BUSINESS FACTORS
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. 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.
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.
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.
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. 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.
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, a revolving credit facility and the public
sale of debentures.
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 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.
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'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.
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. Compaq, IBM and
Hewlett-Packard have chosen Inacom for participation in their build-to-order
programs. Inacom has invested over $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'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.
IMAC distributed support services are managed through various
scheduling and reporting tools that 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 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
At October 1, 1997, computer products and services were 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.
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 90% of the
voice and data systems sold by the Company.
The Company has negotiated purchase arrangements, including price,
delivery, training and support, directly with most major vendors. 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.
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 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.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibit 4.1 Subordinated Indenture dated September 30, 1997
between the Company and Norwest Bank Minnesota,
National Association and the First Supplemental
Indenture thereto dated November 4, 1997.
Exhibit 4.2 First Supplemental Indenture dated November 4, 1997
to the Subordinated Indenture dated September 30,
1997 between the Company and Norwest Bank Minnesota,
National Association.
Exhibit 4.3 4.50% Subordinated Convertible Debenture, Due
November 1, 2004.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INACOM CORP.
November 4, 1997 /s/ David C. Guenthner
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David C. Guenthner
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit Description Page
4.1 Subordinated Indenture dated September 30, 1997 between
the Company and Northwest Bank Minnesota, National
Association.
4.2 First Supplemental Indenture dated November 4, 1997 to the
Subordinated Indenture dated September 30, 1997 between
the Company and Norwest Bank Minnesota, National Association.
4.3 4.50% Subordinated Convertible Debenture, Due November
1, 2004.