UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 17, 1999
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)
(402) 758-3900
Registrant's telephone number, including area code
------------------------------------------------------
(Former name or former address, if changed since last report.)
INTRODUCTION
InaCom Corp. ("InaCom") filed a Form 8-K dated February 17, 1999 reporting
a merger pursuant to which Vanstar Corporation became a wholly-owned subsidiary
of InaCom (the "Merger"). The Form 8-K is hereby amended to add the financial
information required by Item 7(a) and Item 7(b) of Form 8-K. Further, additional
information with respect to InaCom is reported under Item 5 below.
Item 5. OTHER EVENTS.
A. Supplemental Consolidated Financial Statements
In addition to the financial information described under Item
7, InaCom is filing Selected Financial Data, Quarterly Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Audited Supplemental Consolidated Financial Statements as set
forth below as Annex A. On February 17, 1999, InaCom consummated the Merger. The
Merger was accounted for as a pooling of interests and, accordingly, the
Supplemental Consolidated Financial Statements reflect the combined financial
positions and results of operations and cash flows of InaCom and Vanstar for all
periods presented. Upon publication of InaCom's Consolidated Financial
Statements for a period which includes February 17, 1999, the Supplemental
Consolidated Financial Statements will become the historical consolidated
financial statements of InaCom. See Note 2 to the Supplemental Consolidated
Financial Statements.
B. InaCom Special Stockholders' Meeting and Stock Issuance
On February 17, 1999, a special meeting of stockholders of InaCom was
held and stockholders voted approval on the following three items:
Proposal 1: Approval of the issuance of shares of Common Stock, par
value $.10 per share, of InaCom to stockholders of Vanstar
Corporation, a Delaware corporation ("Vanstar") pursuant to
the Agreement and Plan of Merger (the "Merger Agreement")
dated as of October 8, 1998, among Vanstar, InaCom and
InaCom Acquisition, Inc., a Delaware corporation and wholly
owned subsidiary of InaCom, as contemplated by the Merger
Agreement.
FOR 12,565,626 AGAINST 162,183 ABSTAIN 23,893
Proposal 2: Approval of an amendment to the Certificate of Incorporation
of InaCom to increase the number of authorized shares of
InaCom Common Stock.
FOR 12,405,801 AGAINST 327,765 ABSTAIN 18,136
Proposal 3 Approval of an increase of 10,000,000 shares of InaCom
Common Stock authorized for issuance under the 1997 InaCom
Stock Plan.
FOR 9,096,698 AGAINST 3,630,692 ABSTAIN 24,312
On December 31, 1998 there were 16,768,473 shares of InaCom common
stock outstanding. In connection with the exchange of certificates of Vanstar
common stock for InaCom common stock as a result of the Merger, InaCom will
issue approximately 28,026,816 shares of InaCom common stock (provided, however,
that cash will be paid in lieu of any fractional shares a former Vanstar
stockholder would otherwise be entitled to). Therefore, as a result of the
Merger, InaCom will have approximately 44.7 million shares of common stock
outstanding.
Stock options issued under Vanstar's stock option plans were assumed by
InaCom in the Merger and entitle the holders to purchase an aggregate of
approximately 3,813,348 shares of InaCom common stock upon exercise of such
options.
C. New Directors
On February 17, 1999, the InaCom Board of Directors increased its size
from 9 to 13 members and elected the following four individuals to the Board,
all pursuant to the Merger Agreement: William Y. Tauscher, William H. Janeway,
Richard H. Bard, John R. Oltman.
D. Certificate of Incorporation and Bylaws
The Certificate of Incorporation of InaCom, as amended on February 17,
1999 to increase the number of authorized shares of common stock to 100,000,000,
is attached hereto as Exhibit 3.1. The by-laws of InaCom, as amended on February
17, 1999, are attached hereto as Exhibit 3.2.
E. Registration Rights Agreement
Warburg, Pincus Capital Company, L.P. ("Warburg") and William Y.
Tauscher have entered into a registration rights agreement with InaCom covering
the shares of InaCom common stock that each received in the Merger. The
registration rights agreement covers 10,548,800 shares of InaCom common stock
received by Warburg and 1,277,062 shares of InaCom common stock received by Mr.
Tauscher in the Merger. Such shares are subject to the resale restrictions of
Rule 145 of the Securities Act of 1933 and, in order to partly address these
restrictions, the agreement grants certain rights to Warburg to cause InaCom to
register Warburg's shares of InaCom common stock under the Securities Act of
1933, thereby permitting public resale free of such restrictions. Warburg is
entitled to make up to two demands that InaCom register shares of InaCom common
stock held by Warburg, representing at least 18% of the shares received by
Warburg in connection with the Merger on each occasion. Mr. Tauscher may elect
to include not less than 50% of the shares received by him in the Merger in any
demand registration by Warburg if the resales of the InaCom common stock are
made in an underwritten offering. Subject to certain limitations, if InaCom
proposes to register InaCom common stock under the Securities Act of 1933 (other
than certain registrations for business acquisitions or employee stock benefit
plans), Warburg and Mr. Tauscher will have certain rights to include shares
received by them in the Merger in the registration. If Warburg distributes its
shares of InaCom common stock received in the Merger to its limited partners and
general partner, Warburg may require InaCom to file a registration statement
under the Securities Act of 1933 providing for resales by the limited partners
and the general partner of Warburg; however, InaCom is not required to maintain
the effectiveness of such registration statement beyond the first anniversary of
the Merger. The registration rights of Warburg and Mr. Tauscher terminate when
Warburg is permitted to sell all of its shares of InaCom common stock received
in the Merger under Rule 144 of the Securities Act of 1933 during any 90-day
period. The registration rights agreement is attached hereto as Exhibit 4.1.
F. Vanstar's Trust Convertible Preferred Securities
In October 1996, Vanstar Financing Trust (the "Issuer Trust"), a
special purpose financing trust formed by Vanstar, issued 4,025,000 6 3/4% trust
convertible preferred securities (having an aggregate liquidation value of
$201,250,000) in an offering exempt from the registration provisions of the
Securities Act of 1933. At the same time, Vanstar acquired 124,484 6 3/4% trust
convertible common securities from the Issuer Trust (having an aggregate
liquidation value of $6,224,200). The preferred securities and the common
securities represent undivided beneficial interests in the assets of the Issuer
Trust which consist solely of $207,474,200 aggregate principal amount of
Vanstar's 6 3/4% convertible subordinated debentures due 2016.
The Issuer Trust does not and will not have any independent operations.
It was created for the sole and limited purpose of issuing the preferred
securities and the common securities and investing the proceeds thereof in the
Vanstar debentures. Vanstar is obligated to make all payments of funds due under
the Vanstar debentures which, in turn, are remitted to the holders of the
preferred securities and the common securities in the form of a quarterly
dividend. To the extent that the Issuer Trust receives payments on the Vanstar
debentures, but does not, for whatever reason, pass the full amount on to the
holders of the preferred securities and common securities, Vanstar will be fully
bound to pay directly any amount not so passed on.
Prior to the Merger, the preferred securities entitled the holder to
convert each share of preferred security into 1.739 shares of Vanstar common
stock. As a result of the Merger, each of the preferred securities entitles the
holder to purchase from InaCom a number of shares of InaCom common stock that
equals the Merger exchange ratio of .64 multiplied by 1.739 (the conversion
ratio previously applicable to the preferred securities). The following chart
sets forth the changes in conversion rights of the preferred securities:
Vanstar Trust Convertible Preferred Securities
Pre-Merger Post-Merger
Exercisable for..................... Vanstar common stock InaCom common stock
Conversion ratio.................... 1.739 shares of common per 1.113 shares of common per
preferred security preferred security
Conversion price.................... $28.75 per $50.00 $44.92 per $50.00
preferred security preferred security
As of February 17, 1999, InaCom guaranteed, on a subordinated basis,
distributions and other payments due in respect of the preferred securities (the
"Guarantee"). In addition, InaCom entered into a supplemental indenture ("First
Supplemental Indenture") pursuant to which it has assumed as a joint and several
obligor with Vanstar, liability for the payment of principal, premium, if any,
and interest on the Vanstar debentures, as well as the obligation to deliver
shares of InaCom common stock upon conversion of the preferred securities as
described above. The Supplemental Indenture is attached hereto as Exhibit 4.5.
The Guarantee, when taken together with InaCom's obligations under the First
Supplemental Indenture in respect of the Vanstar debentures, provides a full and
unconditional guarantee of the amounts due on the preferred securities.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The following auditors report and financial statements are from Item 8
of Vanstar's Annual Report on Form 10-K, as amended, for the fiscal year ended
April 30, 1998 and are attached hereto as Exhibit 99.1:
Report of Independent Auditors
Consolidated Balance Sheets - April 30, 1998 and April 30, 1997
Consolidated Statements of Income - Three Year Period Ended April
30, 1998
Consolidated Statements of Stockholders' Equity - Three Year
Period Ended April 30, 1998
Consolidated Statements of Cash Flow - Three Year Period Ended
April 30, 1998
Notes to Consolidated Financial Statements - Three Year Period
Ended April 30, 1998
The following financial statements are from Vanstar's Quarterly Report
for the quarter ended October 31, 1998 and are attached hereto as Exhibit 99.2:
Consolidated Balance Sheets as of October 31, 1998 and April 30,
1998
Consolidated Statements of Income for the Three and Six Months
Ended October 31, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the Six Months
Ended October 31, 1998
Consolidated Statements of Cash Flows for the Six Months Ended
October 31, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
The unaudited pro forma combined financial information required by Item
7(b) are attached hereto as Exhibit 99.3.
(c) Exhibits.
3.1 InaCom Certificate of Incorporation as amended to date.
3.2 InaCom Bylaws as amended to date.
4.1 Registration Rights Agreement between InaCom Corp. and
Warburg, Pincus Capital Company, L.P. dated as of October 8,
1998.
4.2 Indenture dated as of October 2, 1996 between Vanstar
Corporation as issuer and Wilmington Trust Company as
trustee.
4.3 Form of 6 3/4% Preferred Securities.
4.4 Form of 6 3/4% Convertible Subordinated Debentures Due 2016.
4.5 First Supplemental Indenture dated as of February 17, 1999
to Indenture dated as of October 2, 1996.
10.1 Separation, Consulting and Noncompetition Agreement dated
October 8, 1998 between InaCom Corp. and William Y.
Tauscher.
12 Statement re: Ratio of Earnings to Fixed Charges
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
99.1 Fiscal Year-End Financial Statement of Business Acquired.
99.2 Quarter-End Financial Statements of Business Acquired.
99.3 Pro Forma Financial Information.
SIGNATURE
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.
March 3, 1999 /s/ David C. Guenthner
By:______________________
David C. Guenthner
Executive Vice President and
Chief Financial Officer
ANNEX A
Page
(a) Selected Financial Data......................................................................... 9
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................................10
(c) Quarterly Financial Data........................................................................19
(d) Supplemental Consolidated Financial Statements..................................................20
Independent Auditors Report.....................................................................21
Consolidated Statements of Operations - Three-Year Period Ended
December 26, 1998.............................................................................22
Consolidated Balance Sheets - December 26, 1998 and
December 27, 1997.............................................................................23
Consolidated Statements of Stockholders' Equity - Three-Year Period
Ended December 26, 1998.......................................................................24
Consolidated Statements of Cash Flow - Three-Year Period
Ended December 26, 1998.......................................................................25
Notes to Consolidated Financial Statements - Three-Year Period
Ended December 26, 1998.......................................................................26
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
Supplemental Selected Consolidated Financial Data - Dollars in thousands except
per share data
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------
Income statement data:
Revenue $6,887,414 $6,735,104 $5,316,841 $4,084,979 $3,231,124
Net earnings (loss) from continuing operations (8,560) 65,403 47,540 19,221 (504)
Earnings (loss) per share from continuing operations
Basic ($0.19) $1.66 $1.27 $0.61 ($0.02)
Diluted ($0.19) $1.57 $1.21 $0.59 ($0.02)
Balance sheet data:
Total assets 1,880,984 2,052,499 1,609,023 1,454,246 1,240,844
Long-term debt, less current maturities of long-term debt 201,941 143,837 61,196 325,944 379,861
Company-obligated mandatorily redeemable convertible
preferred securities of subsidiary trust holding solely
convertible subordinated debt securities of the Company 194,974 194,739 194,518 - -
Stockholders' equity 565,224 533,164 343,801 274,818 157,708
OTHER INFORMATION:
Common stock closing market prices:
High $36.75 $40.13 $39.25 $15.25 $21.00
Low $15.13 $20.00 $13.25 $7.00 $6.87
- -----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of the Financial Condition and Results
of Operations contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company management.
Such statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
including the Risk Factors described in InaCom's Registration Statement on Form
S-4 (333-70649). Should one or more of such risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those described herein as believed, estimated or expected.
Introduction
The following discussion and analysis relates to the Supplemental Consolidated
Financial Statements of InaCom Corp. and its subsidiaries (the "Company" or
"InaCom") for the three-years ended December 26, 1998. On February 17, 1999,
Vanstar Corporation ("Vanstar") became a wholly-owned subsidiary of the Company
and each share of Vanstar common stock was converted into the right to receive
.64 shares of InaCom common stock. In connection with the transaction, InaCom
issued approximately 28.0 million shares of InaCom common stock.
The transaction was accounted for as a pooling of interests and accordingly, the
Supplemental Consolidated Financial Statements reflect the combined financial
position and results of operations and cash flows of the Company and Vanstar for
all periods presented. Upon publication of the Company's Consolidated Financial
Statements for a period which includes the consummation of the merger (February
17, 1999), the Supplemental Consolidated Financial Statements will become the
historical consolidated financial statements of the Company. See Note 2 to the
Supplemental Consolidated Financial Statements.
Results of Operations
The following table sets forth for the indicated periods, revenues, gross
margins and net earnings (loss) before distribution on convertible preferred
securities, and the mix of revenues, gross margins and net earnings (loss)
before distribution on convertible preferred securities for each of the
Company's operating segments.
Summary of Operating Results
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December
1998 (1) 1997 1996 (2) 1998 (1) 1997 1996 (2)
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Revenues:
Products $6,018,823 $5,993,536 $4,809,590 87.4% 89.0% 90.5%
Services 868,591 741,568 507,251 12.6% 11.0% 9.5%
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Total $6,887,414 $6,735,104 $5,316,841 100.0% 100.0% 100.0%
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Gross Margin:
Products $415,279 $437,774 $358,738 54.8% 58.9% 63.6%
Services 342,939 305,902 205,368 45.2% 41.1% 36.4%
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Total $758,218 $743,676 $564,106 100.0% 100.0% 100.0%
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Earnings (loss) before distribution on preferred securities:
Products ($15,934) $48,411 $29,376 N/A 65.1% 55.8%
Services 16,290 25,904 23,308 N/A 34.9% 44.2%
- ----------------------------------- ------------------------------------------ -------------------------------
- ----------------------------------- ------------------------------------------ -------------------------------
Total $356 $74,315 $52,684 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------------------------------------
(1) Earnings (loss) before distribution on preferred securities includes the
impact of restructuring and unusual charges of $45.3 million in 1998.
(2) Earnings (loss) before distribution on preferred securities includes the
impact of non-recurring charges of $1.0 million in 1996.
The following table sets forth for the indicated periods, the gross margin
percentage of the two operating segments and the consolidated gross margin
percentage of the Company.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Fiscal Year Ended December
-----------------------------------------
-----------------------------------------
1998 1997 1996
------------ ------------- ------------
------------ ------------- ------------
Gross Margin:
Products 6.9% 7.3% 7.5%
Services 39.5% 41.3% 40.5%
Consolidated Gross Margin 11.0% 11.0% 10.6%
- -----------------------------------------------------------------------------
1998 COMPARED TO 1997
Revenues
Revenues for 1998 increased $152.3 million or 2.3% to $6.9 billion when
comparing the fiscal year ended December 26, 1998 with the fiscal year ended
December 27, 1997. Revenue growth resulted primarily from an increase in
services revenue. Services revenues increased $127.0 million or 17.1% over 1997
while product revenues increased $25.3 million or 0.4% over 1997.
Revenues from services increased as a result of increased demand for service
offerings, increased sales efforts for such service offerings, and the inclusion
of these services with increasing product sales. The total increase was $127.0
million, which includes $121.0 million attributable to an increase in services
sales through the client direct side of the business.
Product revenues increased primarily as a result of an increase in products
shipped directly to end-user clients. Product revenues through the client direct
side of the business increased $117.9 million or 2.8% compared to 1997. This
increase was partially offset by a decrease in product revenues through the
independent dealer channel. Product revenues through the independent dealer
channel decreased $92.7 million or 5.0% compared to 1997. A number of factors
contributed to the decline in revenues in the independent dealer channel. The
Company increased its efforts on the client direct side of the business in 1998
while de-emphasizing the high volume, lower-margin distribution business.
Pricing pressures and changes in vendor funding also made the independent dealer
market less profitable in 1998. Product availability issues along with dealers
reducing their inventory levels in response to changes in the terms and
conditions offered by the manufacturers also contributed to the decline in the
independent dealer revenues.
Gross Margins
The Company's consolidated gross margin percentage in 1998 was unchanged from
1997. A change in the revenue mix to include more of the higher-margin services
sales was offset by a decrease in the products gross margin percentage. The
gross margin percentage on products decreased in 1998 compared to 1997 as a
result of increased competition, increases in freight charges, and decreases in
vendor rebates. This decrease was only partially offset by a change in the mix
to include more of the higher-margin client direct business as compared to
lower-margin independent dealer business.
The gross margin percentage on services decreased in 1998 compared to 1997. This
decrease was attributable to lower utilization rates realized by services
specialists hired in 1998. The lower utilization rates of the newly hired
services specialists were primarily a result of the learning process before such
specialists become a fully utilized and billable resource. This decrease was
partially offset by more rapid growth in higher-margin technology support and
integration services offerings compared to lower-margin technology procurement
services in 1998 versus 1997.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased $88.4 million or
15.7% in 1998. SG&A as a percent of revenues increased to 9.5% in 1998 versus
8.4% in 1997. Excluding the impact of $30.3 million in unusual charges
recognized by the Company in 1998 (see "Restructuring and Unusual Charges"),
SG&A increased $58.1 million or 10.3%. SG&A as a percent of revenues, excluding
the impact of the unusual charges, increased to 9.0% in 1998 versus 8.4% in
1997. The increase in SG&A and SG&A as a percent of revenues was primarily due
to a decrease in vendor rebates and a change in the revenue mix to include more
services revenues which carries higher SG&A expenses than does products
revenues.
Restructuring and Unusual Charges
The Company incurred restructuring charges of $12.0 million during 1998 which
includes the cost of involuntary employee separation benefits, facility closures
and consolidations, and related costs associated with business realignment and
restructuring actions. Facility closure costs are approximately $6.0 million and
include future lease payments, costs to abandon or dispose of property and
equipment and write-off of capitalized software net of estimates of sublease
revenues and disposal values. Employee separation benefits are approximately
$3.0 million and include severance, medical, and other benefits for
approximately 250 permanent full-time employees. Business realignment costs
relate to the decision to exit the discrete training business as the Company
focuses on its core competencies as part of the realignment of certain of the
Company's operating units, contract termination costs, and other related costs
and are approximately $3.0 million.
Unusual charges not qualifying as restructuring charges totaled $33.3 million,
of which $30.3 million are reflected in selling, general and administrative
expenses and $3.0 million are reflected in direct costs. These unusual charges
consist primarily of the write-off of certain equipment and capitalized
software, costs to liquidate excess spare parts and certain inventory
adjustments. Capitalized software and lease costs of $9.0 million include the
write-off of systems associated with the centralized dispatch and scheduling
functions and obsolete hardware and software due to the upgrade of call
technology implemented by the Company. The Company also liquidated excess spare
parts due to the centralization of its spare parts management and the
outsourcing of a substantial portion of its spare parts procurement and repair
to a single vendor resulting in a net charge of $16.5 million. Inventory
adjustments of $5.4 million include costs associated with the early return of
certain inventory items to a major vendor in an effort to reduce interest
expense and additional inventory reserves to record inventory at lower of cost
or market due to the reduced price protection available from major vendors as
part of the supply chain reengineering. Other items of $2.4 million consist
primarily of the incentive pay to retain certain employees during the
restructuring activities and costs associated with the termination of certain
marketing commitments.
Financing Expense
Financing expense for 1998 increased by $6.2 million to $66.5 million. Financing
expense increased primarily as a result of higher average daily borrowings, the
temporary use of more expensive financing during the transition to the Company's
new financing agreements in the second quarter of 1998, and a financing charge
recognized in the third quarter of 1998. The pre-tax financing charge of $1.3
million, recognized under Statement of Financial Accounting Standard (SFAS) No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," related to the sale of assets under an accounts
receivable securitization completed in July 1998. The increase in average daily
borrowings was partially offset by a decrease in the average daily borrowing
rate (excluding the impact of the temporary financing and the financing charge).
The increase in average daily borrowings during 1998 resulted from financing an
increase in accounts receivable which resulted from an increase in revenues and
vendor receivables during this period. The decrease in the average daily
borrowing rate in 1998 (excluding the impact of the temporary financing and the
financing charge) resulted primarily from the issuance of $86.25 million of 4.5%
convertible subordinated debentures in November 1997 (see "Liquidity and Capital
Resources"), the Company's new financing agreements, and the favorable borrowing
rates in the financial markets.
Distribution on Convertible Preferred Securities of Trust, Net of Tax
In October 1996, the Vanstar Financing Trust (the "Trust"), a special purpose
financing trust formed by Vanstar, issued 4,025,000 6 3/4% trust convertible
preferred securities. Distributions on preferred securities accrue at an annual
rate of 6 3/4% of the liquidation value of $50 per security ($201,250,000 in the
aggregate) and are included in "Distributions on convertible preferred
securities of Trust, net of income taxes" in the Consolidated Statements of
Operations.
Net Earnings (Loss)
Net earnings (loss) are reported after giving effect to the distributions on
convertible preferred securities, which were $8.9 million in both 1998 and 1997.
Including the impact of the financing charge under SFAS No. 125 (see "Financing
Expense") and the restructuring and unusual charges recorded by the Company (see
"Restructuring and Unusual Charges"), the net loss was $8.6 million, or $0.19
per diluted share, in 1998 compared to net earnings of $65.4 million, or $1.57
per diluted share, in 1997. Excluding the financing charge under SFAS No. 125 of
$0.7 million after-tax and the restructuring and unusual charges of $45.3
million, net earnings were $37.5 million, or $0.85 per diluted share, in 1998.
These decreases resulted from the factors discussed above.
1997 COMPARED TO 1996
Revenues
Revenues for 1997 increased $1.4 billion or 26.7% to $6.7 billion when comparing
the fiscal year ended December 27, 1997 with the fiscal year ended December 28,
1996. Revenue growth resulted from an increase in all revenue components.
Product revenues increased $1.2 billion or 24.6% over 1996 and revenues from
services increased $234.3 million or 46.2% over 1996.
Product revenues increased primarily as a result of an increase in products
shipped directly to the end-user, successful sales and marketing efforts, and
overall industry growth. Product revenues through the client direct side of the
business increased $944.7 million or 29.4% compared to 1996 and product revenues
through the independent dealer channel increased $239.2 million or 14.9%
compared to 1996.
Revenues from services increased as a result of increased demand for service
offerings, increased sales efforts for such service offerings, and the inclusion
of these services with increasing product sales. The total increase was $234.3
million, which includes $230.3 million attributable to an increase in sales
through the client direct side of the business.
Gross Margins
The increase in the Company's gross margin percentage for 1997 was primarily due
to the change in the revenue mix to include more of the higher-margin services
revenue versus lower-margin products revenue. The decrease in the gross margin
percentage for products in 1997 was primarily due to a decrease in the gross
margin percentage on product sales through the independent dealer channel. This
decrease was partially offset by an increase in the gross margin percentage on
product sales through the client direct side of the business. The increase in
gross margin percentage for services resulted primarily from a change in the mix
of services to include more of the higher-margin technology integration services
partially offset by a decrease in technology support services and an increase in
lower-margin technology procurement services.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased $118.8 million or
26.7% in 1997. SG&A as a percent of revenues was unchanged at 8.4% in 1997 and
1996. The increase in SG&A spending was primarily due to the increased volume of
products and services revenues.
Financing Expense
Financing expense for 1997 increased by $25.5 million to $60.3 million.
Financing expense increased primarily due to higher average daily borrowings
partially offset by lower borrowing rates. The increase in the average daily
borrowings resulted primarily from the additional financing required to support
additional accounts receivable and higher inventory levels. The decrease in the
borrowing rate resulted from the Company selling additional accounts receivable
through asset securitization programs, the issuance of $55.25 million of 6.0%
convertible subordinated debentures in June 1996 for which a full year's benefit
was realized in 1997, the issuance of $86.25 million of 4.5% convertible
subordinated debentures in November 1997, and favorable borrowing rates in the
financial markets (see "Liquidity and Capital Resources").
Net Earnings
Net earnings are reported after giving effect to the distributions on
convertible preferred securities, which were $8.9 million in 1997 and $5.1
million in 1996. Net earnings for 1997 increased 37.6% to $65.4 million compared
to net earnings of $47.5 million, which included non-recurring charges of $1.0
million, for 1996. Earnings per share increased to $1.57 per diluted share from
the $1.21 per diluted share, which includes non-recurring charges of $0.02 per
diluted share, reported for 1996. The increase resulted from the factors
discussed above.
Non-Material 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 a non-recurring charge of $1.0
million to net earnings related to the business combinations during the fourth
quarter of 1996. The effect of the non-material poolings was to increase
stockholders' equity by approximately $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are provided through a $350.0 million
line of credit under a financing agreement with IBMCC, a senior secured
revolving credit facility with Deutsche Bank of up to $250.0 million, and asset
securitization programs with JP Morgan and Nesbitt Burns aggregating up to
$425.0 million. Capital resources also include $201.3 million in
Company-obligated mandatorily redeemable convertible preferred securities of a
subsidiary trust holding solely convertible subordinated debt securities of the
Company and $141.5 million of convertible subordinated debentures.
As a result of the February 1999 merger between InaCom and Vanstar, all amounts
outstanding under the $350.0 million financing agreement, the $250.0 million
senior secured revolving credit facility, and the $425.0 million asset
securitization programs became immediately due and payable. The Company has
received written waivers precluding such debt acceleration under each of the
agreements from the parties to these agreements. In addition, as a result of the
merger, the Company will give notice to the holders of $141.5 million of
convertible subordinated debentures that a holder can require the Company to
repurchase such holder's debentures at 100% of the principal amount plus accrued
and unpaid interest. The holders may only exercise such repurchase option during
the 30-day period following the date of the notice.
The Company has a $350.0 million line of credit under its financing agreement
with IBMCC. On December 26, 1998, the Company had $247.4 million outstanding
under that facility, of which $70.9 million was included in accounts payable and
$176.5 million was classified as short-term borrowings. Borrowings under the
line of credit are subject to certain borrowing base limitations and are secured
by portions of the Company's inventory, accounts receivable, and certain other
assets. On December 26, 1998, amounts borrowed under the line of credit carried
an interest rate of 6.8% based on LIBOR. The line of credit expires March 31,
1999. The Company presently plans to allow this line of credit to expire, and to
replace the interest-bearing working capital portion with the senior secured
bank facility and to transfer the non-interest bearing floor planning portion to
the Company's existing $400.0 million floor planning facility with IBMCC.
The senior secured revolving credit facility, which expires in April 2002, was
entered into in April 1998 for $200.0 million and was increased in August 1998
to $250.0 million. Certain inventory and assets of the Company secure this
facility. On December 26, 1998, $60.0 million was outstanding under this
facility with an interest rate of 6.6% based on LIBOR.
In December 1996, the Company established an asset securitization facility,
which currently provides the Company with up to $175.0 million in available
credit. Pursuant to this asset securitization facility, the Company sells an
undivided percentage ownership interest in certain accounts receivable. As of
December 26, 1998, the proceeds of this receivable sale transaction totaled
$175.0 million. On December 26, 1998, the implicit interest rate on the
receivable sale transaction was 5.5%.
In July 1998, the Company entered into another asset securitization facility to
fund up to $250.0 million by selling certain direct division trade 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. On December 26, 1998, $231.0 million was
funded under the program. On December 26, 1998, the implicit interest rate on
the receivable sale transaction was 5.7%.
The $141.5 million of convertible subordinated debentures consists of $86.25
million of 4.5% convertible subordinated debentures issued in November 1997 and
$55.25 million of 6.0% convertible subordinated debentures issued in June 1996.
The 1997 debentures are due November 1, 2004 and are convertible into common
stock of the Company at a conversion rate of 25.235 shares per each $1,000
principal amount of debentures (equivalent to a conversion price of $39.63 per
share), subject to adjustments under certain circumstances. The 1997 debentures
are not redeemable by the Company prior to November 1, 2001; thereafter the
Company may redeem the debentures at various premiums to principal amount. The
1997 debentures may also be redeemed at the option of the holder 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 merger
between InaCom and Vanstar is a Change in Control. As a result, the Company will
give notice to the holders of the 1997 debentures that a holder can require
InaCom to repurchase such holder's debentures at 100% of the principal amount
plus accrued and unpaid interest. The holders may only exercise such repurchase
option during the 30-day period following the date of the notice. Subject to
certain conditions, InaCom will either pay the repurchase price in cash or in
InaCom common stock valued at 95% of the average of the closing prices of InaCom
common stock for a five trading day period ending on the third trading day
preceding the repurchase date.
The 1996 debentures are due June 15, 2006 and are convertible into common stock
of the Company at a conversion price of $24.00 per share, subject to adjustments
under certain circumstances. The 1996 debentures are not redeemable by the
Company prior to June 16, 2000; thereafter the Company may redeem the debentures
at various premiums to principal amount. The 1996 debentures may also be
redeemed at the option of the holder 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 merger between InaCom and Vanstar is a
Change in Control. As a result, the Company will give notice to the holders of
the 1996 debentures that a holder can require InaCom to repurchase such holder's
debentures at 100% of the principal amount plus accrued and unpaid interest. The
holders may only exercise such repurchase option during the 30-day period
following the date of notice.
In October 1996, the Company's subsidiary trust issued certain preferred
securities, raising gross proceeds of $201.3 million. The holders of the
preferred securities are entitled to cumulative cash distributions at an annual
rate of 6 3/4% of the liquidation amount of $50 per security. The distributions
are payable quarterly in arrears in the aggregate amount of approximately $3.5
million per quarter. The aggregate net proceeds to the Company from this
offering totaled $194.4 million after selling expenses, discounts, and
commissions. The preferred securities are convertible at the option of the
holder into InaCom common stock at a conversion rate of 1.113 shares of InaCom
common stock for each preferred security (equivalent to a conversion price of
$44.92 per share).
Long-term debt was 26.3% of total long-term debt and equity on December 26, 1998
versus 21.2% on December 27, 1997. The decrease was a result of an increase in
equity due to the issuance of additional shares of common stock, primarily in
relation to business combinations.
The Company's credit facilities contain certain restrictive covenants, including
the maintenance of minimum levels of working capital and net worth, limitations
on the amount of funded debt and interest expense, limitations on incurring
additional indebtedness, and restrictions on the amount of dividends the Company
can pay to stockholders. As of December 26, 1998, the Company was in compliance
with or had received written waivers for the covenants contained in these
agreements.
The Company occasionally uses derivative financial instruments to limit the
effect of increases in the interest rates on certain floating-rate debt. The
Company does not hold or issue derivative financial instruments for trading
purposes. As of December 26, 1998 the Company had two separate interest rate
swap agreements each for an aggregate notional amount of $100 million with
unrelated financial institutions, which were entered into in September 1998 and
November 1998 and resulted in certain floating-rate interest payment obligations
becoming fixed-rate interest payment obligations at 5.2% and 4.7%, respectively.
The September 1998 interest rate swap agreement is a one-year agreement with a
one-year extension at the provider's option. The November 1998 interest rate
swap is a four-year agreement with a call provision at the provider's option
after three years. An interest rate swap agreement entered into in January 1997
carrying a fixed-rate interest payment obligation at 5.8% for an aggregate
notional amount of $100 million expired in January 1998, an interest rate swap
agreement entered into in October 1997 carrying a fixed-rate interest payment
obligation of 5.7% for an aggregate notional amount of $100 million was
terminated in September 1998, and an interest rate swap agreement entered into
in March 1998 carrying a fixed-rate interest payment obligation of 5.7% for an
aggregate notional amount of $100 million was terminated in November 1998 As a
result of the above mentioned swap agreements, financing expense was increased
by approximately $0.2 million in 1998.
During 1998, the Company generated $207.6 million of cash from operations.
Inventory decreased by $454.3 million during 1998 with a portion of the decrease
offset by a decrease in accounts payable of $188.2 million. Accounts receivable
increased $157.6 million during 1998. Inventory decreased primarily as a result
of the vendors' changes in terms and conditions and the Company's efforts in
managing its inventory levels. Accounts payable decreased as a result of the
decrease in inventory levels. Accounts receivable increased as a result of an
increase in vendor receivables.
The Company used $147.9 million in cash for investing activities in 1998. Cash
of $73.3 million was used to purchase fixtures and equipment. Cash of $57.2
million was used for business combinations and contingent payments related to
business combinations (See Note 2 - Business Combinations in Notes to
Supplemental Consolidated Financial Statements).
Net cash used in financing activities in 1998 totaled $55.5 million, of which
$60.6 million was used to repay short-term borrowings and $7.3 million was used
to repay long-term debt. This was partially offset by the $6.3 million in cash
that was provided by the issuance of stock under employee stock plans and the
$6.0 million in cash that was provided from the sale of additional trade
accounts receivable.
The Company believes the funding expected to be generated from operations and
provided by the credit facilities existing on December 26, 1998 will be
sufficient to meet working capital and capital investment needs in 1999.
YEAR 2000
InaCom began preparing its computer-based systems for year 2000 ("Y2K") computer
software compliance issues in 1996. Historically, certain computer programs were
written using two digits rather than four to define the applicable year. As a
result, software may recognize a date using the two digits "00" as 1900 rather
than the year 2000. Computer programs that do not recognize the proper date
could generate erroneous data or cause systems to fail. InaCom's Y2K project
covers both traditional computer systems and infrastructure ("IT Systems") and
computer-based hardware and software, facilities and equipment ("Non-IT
Systems"). InaCom's Y2K project has six phases: inventory, assessment,
renovation, testing, implementation and contingency planning.
InaCom completed the remediation of its critical business systems during the
fourth quarter of 1998. InaCom expects to replace any non-compliant IT Systems
by the end of the first quarter of 1999, with testing and implementation
completed by the end of the second quarter of 1999. InaCom will replace
non-compliant systems acquired pursuant to the Vanstar merger in the third
quarter of 1999. InaCom has also completed an inventory and assessment of its
Non-IT Systems, which are primarily located at its distribution centers and
office locations. InaCom expects to replace any non-compliant systems by the end
of the first quarter of 1999, with testing and implementation completed by the
end of the second quarter of 1999.
InaCom's Y2K project also considers the readiness of significant customers and
vendors. Such significant vendors have indicated to InaCom an expectation to be
Y2K compliant. However, the non-compliance of such vendors could impair the
ability of InaCom to obtain necessary products or to sell or provide services to
its customers. Disruptions of the computer systems of InaCom's vendors could
have a material adverse effect on InaCom's financial conditions and results of
operations for the period of such disruption.
InaCom believes that the most reasonably likely worst case Y2K scenario is that
a small number of vendors will be unable to supply components for a short time
after January 1, 2000, with a resulting disruption of product shipments and
services to InaCom's customers. As part of its Y2K process, InaCom is developing
contingency plans with respect to such a scenario and the vendors who are either
unable or unwilling to develop remediation plans to become Y2K compliant.
InaCom's contingency plans will contain a combination of actions including
stockpiling of products and components and selective resourcing of business to
Y2K compliant vendors.
InaCom had incurred approximately $5.1 million of Y2K project expenses as of
December 26, 1998. Future expenses are estimated to include approximately $1.3
million of additional costs. Such cost estimates are based upon presently
available information and may change as InaCom continues with its Y2K project.
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
SUPPLEMENTAL FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Weighted Average Closing Stock
Net per Share Shares Outstanding Market Price
------------------- ---------------------- ------------------
Gross Net ------------------- ---------------------- ------------------
Revenues Margin Earnings Basic Diluted Basic Diluted High Low
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
(Dollars and shares in thousands, except per share amounts)
1998
First $1,671,888 $182,650 $16,737 $0.39 $0.37 42,700 48,200 $32.75 $23.44
Second 1,841,387 197,604 11,857 0.27 0.26 43,300 48,900 36.75 26.00
Third 1,658,116 187,599 (12,887) (0.29) (0.29) 44,600 44,600 33.63 16.38
Fourth 1,716,023 190,365 (24,267) (0.54) (0.54) 44,800 44,800 20.75 15.13
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
Year $6,887,414 $758,218 ($8,560) ($0.19) ($0.19) 43,900 43,900 $36.75 $15.13
============== ============== =========== ========= ======== ========== ========== ======== ========
============== ============== =========== ========= ======== ========== ========== ======== ========
1997
First $1,522,324 $161,667 $11,805 $0.31 $0.29 38,500 41,800 $40.13 $20.63
Second 1,713,963 186,669 16,009 0.41 0.39 39,000 42,500 32.50 20.00
Third 1,716,698 192,399 17,686 0.45 0.43 39,300 42,500 37.63 31.13
Fourth 1,782,119 202,941 19,903 0.48 0.45 41,300 45,900 39.38 24.38
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
-------------- -------------- ----------- --------- -------- ---------- ---------- -------- --------
Year $6,735,104 $743,676 $65,403 $1.66 $1.57 39,500 43,000 $40.13 $20.00
============== ============== =========== ========= ======== ========== ========== ======== ========
============== ============== =========== ========= ======== ========== ========== ======== ========
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE
IMPACT OF VANSTAR MERGER)
Supplemental Consolidated Financial Statements
December 26, 1998 and December 27, 1997
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors
InaCom Corp.:
We have audited the accompanying supplemental consolidated financial statements
of InaCom Corp. and subsidiaries as of December 26, 1998 and December 27, 1997,
and the related supplemental consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 26, 1998. In connection with our audits of the
supplemental consolidated financial statements, we have also audited the
supplemental financial statement schedule for the three-year period ended
December 26, 1998. These supplemental consolidated financial statements and
supplemental financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
supplemental consolidated financial statements and supplemental consolidated
financial statement schedule based on our audits. We did not audit the financial
statements of Vanstar Corporation ("Vanstar") prior to 1998, a company acquired
in February 1999 in a business combination accounted for as a
pooling-of-interests. Such statements are included in the consolidated financial
statements of the Company and reflect total assets constituting 53.3 percent as
of December 27, 1997 and total revenues constituting 42.1 percent and 41.7
percent for the years ended December 27, 1997 and December 28, 1996,
respectively, of the related consolidated totals. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for Vanstar, is based solely on
the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of InaCom Corp. and Vanstar on February 17, 1999, which has been
accounted for as a pooling-of-interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of InaCom Corp. and subsidiaries after
financial statements covering the date of consummation of the business
combination are issued.
In our opinion, based on our audit and report of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of InaCom Corp. and
subsidiaries as of December 26, 1998 and December 27, 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 26, 1998, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination. Also in our
opinion, the related supplemental financial statement schedule, when considered
in relation to the supplemental 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 19, 1999
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Three-year period ended December 26, 1998
(Amounts in thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Revenues:
Products $6,018,823 $5,993,536 $4,809,590
Services 868,591 741,568 507,251
- ---------------------------------------------------------------------------------------------------------------------
6,887,414 6,735,104 5,316,841
- ---------------------------------------------------------------------------------------------------------------------
Direct costs:
Products 5,603,544 5,555,762 4,450,852
Services 525,652 435,666 301,883
- ---------------------------------------------------------------------------------------------------------------------
6,129,196 5,991,428 4,752,735
- ---------------------------------------------------------------------------------------------------------------------
Gross margin 758,218 743,676 564,106
Selling, general and administrative expenses 651,835 563,399 444,626
Restructuring charges 12,009 - -
- ---------------------------------------------------------------------------------------------------------------------
Operating income 94,374 180,277 119,480
Financing expense, net 66,513 60,311 34,768
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and distributions on preferred
securities of trust 27,861 119,966 84,712
Income tax expense 27,505 45,651 32,028
- ---------------------------------------------------------------------------------------------------------------------
Earnings before distributions on preferred securities of trust 356 74,315 52,684
Distributions on preferred securities of trust, less taxes of $4,668; $5,013;
and $2,893 in 1998, 1997, and 1996, respectively 8,916 8,912 5,144
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) ($8,560) $65,403 $47,540
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic ($0.19) $1.66 $1.27
Diluted ($0.19) $1.57 $1.21
- ---------------------------------------------------------------------------------------------------------------------
Common shares and equivalents outstanding:
Basic 43,900 39,500 37,500
Diluted 43,900 43,000 40,000
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial statements.
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
December 26, 1998 and December 27, 1997
(Amounts in thousands, except share data)
- ---------------------------------------------------------------------------------------------------------------
Assets 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $69,939 $62,068
Accounts receivable, less allowance for doubtful accounts of $15,381 in 1998 and
$14,203 in 1997 705,305 594,819
Inventories 485,283 899,836
Other current assets 33,090 21,735
Deferred income taxes 26,255 23,714
- ---------------------------------------------------------------------------------------------------------------
Total current assets 1,319,872 1,602,172
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, at cost 379,292 352,238
Less accumulated depreciation 182,162 144,493
- ---------------------------------------------------------------------------------------------------------------
Net property and equipment 197,130 207,745
- ---------------------------------------------------------------------------------------------------------------
Other assets, net of accumulated amortization of $18,086 in 1998 and $17,732 in 1997 49,520 47,375
Cost in excess of net assets of businesses acquired,
net of accumulated amortization of $33,863 in 1998 and $21,775 in 1997 314,462 195,207
- ---------------------------------------------------------------------------------------------------------------
$1,880,984 $2,052,499
- ---------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $554,217 $699,700
Notes payable and current maturities of long-term debt 179,829 314,151
Income taxes payable 3,937 5,908
Other current liabilities 179,684 159,831
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 917,667 1,179,590
- ---------------------------------------------------------------------------------------------------------------
Other long-term liabilities 1,178 1,169
Long-term debt, less current maturities 201,941 143,837
Company-obligated mandatorily redeemable convertible preferred securities of
subsidiary trust holding solely convertible subordinated debt securities
of the Company 194,974 194,739
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 100,000,000 shares;
issued shares 44,795,289 in 1998 and 42,658,028 in 1997 4,480 4,266
Additional paid-in capital 407,159 346,870
Accumulated other comprehensive income (2,480) (374)
Retained earnings 157,302 182,402
- ---------------------------------------------------------------------------------------------------------------
566,461 533,164
Unearned restricted stock (1,237) -
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 565,224 533,164
- ---------------------------------------------------------------------------------------------------------------
$1,880,984 $2,052,499
- ---------------------------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial statements.
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three-year period ended December 26, 1998
(Amounts in thousands)
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common stock Additional other Unearned Total
------------- paid-in Treasury comprehensive Retained restricted stockholders'
Shares Amount capital Stock income earnings stock equity
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 36,745 $3,675 $202,315 ($161) $ - $69,459 ($470) $274,818
Comprehensive income, net of tax:
Net earnings - - - - - 47,540 - 47,540
Foreign currency translation adjustment - - - - - - - -
Unrealized gain on available for sale
security - - - - 1,373 - - 1,373
------------
------------
Comprehensive income 48,913
Shares issued in connection
with business combinations 691 69 6,581 - - - - 6,650
Shares issued under stock plans, net of tax 750 75 12,652 161 - - - 12,888
effect
Amortization of unearned restricted stock - - - - - - 455 455
Other 118 12 65 - - - - 77
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996 38,304 3,831 221,613 - 1,373 116,999 (15) 343,801
Comprehensive income, net of tax:
Net earnings - - - - - 65,403 - 65,403
Foreign currency translation adjustment - - - - (167) - - (167)
Unrealized loss on available for sale
security - - - - (1,580) - - (1,580)
------------
------------
Comprehensive income 63,656
Shares issued through public offering,
net of offering expenditures 3,000 300 92,650 - - - - 92,950
Shares issued in connection
with business combinations 860 86 24,397 - - - - 24,483
Shares issued under stock plans, net of tax
effect 494 49 8,210 - - - - 8,259
Amortization of unearned restricted stock - - - - - - 15 15
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 27, 1997 42,658 4,266 346,870 - (374) 182,402 - 533,164
Adjustments to conform company year - ends (161) (16) (2,785) - (1,117) (16,540) - (20,458)
Comprehensive income, net of tax:
Net loss - - - - - (8,560) - (8,560)
Foreign currency translation adjustment - - - - 38 - - 38
Unrealized loss on available for sale
security - - - - (1,027) - - (1,027)
------------
------------
Comprehensive income (9,549)
Shares issued in connection
with business combinations 1,785 179 53,789 - - - - 53,968
Shares issued in connection
with equity investment 54 5 1,457 - - - - 1,462
Shares issued under stock plans, net of tax
effect 459 46 7,828 - - - (1,529) 6,345
Amortization of unearned restricted stock - - - - - - 292 292
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 26, 1998 44,795 $4,480 $407,159 - ($2,480) $157,302 ($1,237) $565,224
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial
statements
INACOM CORP. AND SUBSIDIARIES (INCLUDES RETROACTIVE IMPACT OF VANSTAR MERGER)
Supplemental Consolidated Statements of Cash Flows
Three-year period ended December 26, 1998
(Amounts in thousands)
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss) ($8,560) $65,403 $47,540
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation and amortization 78,121 58,403 39,553
Noncash restructuring and unusual charges 39,053 - -
Changes in assets and liabilities, net
of effects from business combinations:
Accounts receivable (153,557) (197,486) (143,479)
Inventories 454,282 (98,168) (65,418)
Other current assets (14,329) 3,737 (6,073)
Accounts payable (188,226) (30,148) 14,663
Other liabilities 18,809 2,509 (2,885)
Income taxes (17,972) (4,902) 20,600
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 207,621 (200,652) (95,499)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Business combinations (57,211) (49,011) (60,112)
Proceeds from sale of building - - 3,125
Additions to property and equipment (73,332) (106,531) (51,464)
Other (17,337) (14,184) (25,435)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (147,880) (169,726) (133,886)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from (payments of) notes payable (60,554) 93,179 (151,576)
Proceeds from issuance of convertible preferred
securities of trust, net - - 194,320
Proceeds from receivables sold 6,000 125,000 175,000
Principal payments on long-term debt (7,286) (10,121) (55,596)
Proceeds from offering of public stock - 92,950 -
Proceeds from long-term debt - 86,250 55,250
Proceeds from employee stock plans 6,345 8,259 12,888
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (55,495) 395,517 230,286
- ---------------------------------------------------------------------------------------------------------------------
Change in accumulated other comprehensive income 38 (167) -
- ---------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 4,284 24,972 901
Adjustment to conform company year ends 3,587 - -
Cash and cash equivalents, beginning of year 62,068 37,096 36,195
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $69,939 $62,068 $37,096
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to supplemental consolidated financial statements.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
The supplemental consolidated financial statements include the accounts of
InaCom Corp. (Company) and its wholly-owned subsidiaries. The Company is a
single-source provider of information technology products and technology
management services designed to enhance the productivity of information systems
primarily of Fortune 1000 clients. The Company offers a comprehensive range of
integrated life cycle services to manage the entire technology life cycle. The
Company sells its products and services through a marketing network of
company-owned business centers throughout the United States that focus on
serving large corporations. The Company also has a network of value-added
resellers that typically have regional, industry, or specific product focus. All
significant intercompany balances and transactions have been eliminated in
consolidation.
On February 17, 1999, subsequent to the Company's fiscal year ended December 26,
1998, the Company issued 0.64 shares of common stock for each share of Vanstar
common stock outstanding which was approximately 28.0 million shares of its
common stock for all the outstanding common stock of Vanstar Corp. Vanstar Corp.
("Vanstar") is a provider of products and services to Fortune 1000 companies and
other large enterprises which enable those customers to build, manage and
enhance their personal computer networks. This business combination was
accounted for as a pooling-of-interests combination and, accordingly, the
Company's supplemental consolidated financial statements have been restated to
include the accounts and results of Vanstar as if the companies had operated
together from the beginning of the earliest period presented.
(b) 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, spare parts,
and related materials. Periodically, the Company assesses the appropriateness of
the inventory valuations giving consideration to obsolete, slow-moving and
nonsalable inventory.
In order to adequately service its customers, the Company is required to
maintain quantities of consumable and repairable parts ("spare parts") for
extended periods of time. Based on historical experience, the Company determines
an allocation of the spare parts to both current inventories and property and
equipment.
(c) Other Assets
Other assets include vendor authorization rights, long-term notes receivable,
and other long term investments which are valued at cost. Vendor authorization
rights are being amortized over their contractual life of ten years.
Available-for-sale securities are also included in other assets and are being
valued at market with any unrealized gain or loss included as a component of
other comprehensive income, net of income taxes.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Cost in Excess of Net Assets of Business Acquired
The excess of the cost over the fair value of assets of businesses acquired is
being amortized on a straight-line basis over the expected periods to be
benefited, generally over twenty to twenty-five 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.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(e) Depreciation
Depreciation on property and equipment is calculated on the straight-line method
over the estimated useful lives of the respective assets ranging from three to
thirty-nine years using the straight-line method.
(f) 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 and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years 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.
(g) 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 or ratably if performed over a service contract period.
Deferred revenue primarily represents unrecognized service revenue.
(h) Advertising and Promotional Costs
Advertising and promotional costs are expensed as incurred and amounted to $19.1
million, $18.7 million, and $16.9 million for each of the three years ended
December 26, 1998, respectively.
(i) Marketing Development Funds
Primary vendors of the Company provide various incentives, in cash or credit
against obligations, for promoting and marketing their product offerings.
Beginning in May 1998, funds or credits received became primarily based on the
sales of the vendors' 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 5% of
sales.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j) Risks and Uncertainties
Financial instruments, which potentially expose the Company to a concentration
of credit risk, principally consist of accounts receivable. The Company sells
products to a large number of customers in many different industries and various
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.
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.
(k) Financial Instruments
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable, and notes payable and short-term borrowings approximate fair
value because of the short maturity of these instruments. The fair values of the
convertible subordinated debentures 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 convertible subordinated debentures approximates book
value. The carrying value of the preferred securities (see Note 8 Convertible
Preferred Securities of Trust) approximates their fair value based upon quoted
market prices.
The Company occasionally uses derivative financial instruments to limit the
effect of increases in the interest rates on certain floating-rate debt. The
Company does not hold or issue derivative financial instruments for trading
purposes. As of December 26, 1998 the Company had two separate interest rate
swap agreements for an aggregate notional amount of $100 million each with
unrelated financial institutions, which were entered into in September 1998 and
November 1998 and resulted in certain floating-rate interest payment obligations
becoming fixed-rate interest payment obligations at 5.2% and 4.7%, respectively.
The September 1998 interest rate swap agreement is a one-year agreement with a
one-year extension at the provider's option. The November 1998 interest rate
swap is a four-year agreement with a call provision at the provider's option
after three years. An interest rate swap agreement entered into in January 1997
carrying a fixed-rate interest payment obligation of 5.8%, for an aggregate
notional amount of $100 million expired in January 1998, an interest rate swap
agreement entered into in October 1997 carrying a fixed-rate interest payment
obligation of 5.7%, for an aggregate notional amount of $100 million was
terminated in September 1998, and an interest rate swap agreement entered into
in March 1998 carrying a fixed-rate interest payment obligation of 5.7%, for an
aggregate notional amount of $100 million was terminated in November 1998. As a
result of the above mentioned swap agreements, financing expense was increased
by approximately $0.2 million in 1998. The fair value of the swap agreements as
of December 26, 1998 was $1.1 million.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) 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
On February 17, 1999, subsequent to the Company's fiscal year ended December 26,
1998, the Company issued 0.64 shares of common stock for each share of Vanstar
common stock outstanding which was approximately 28.0 million shares of the
Company's common stock for all the outstanding common stock of Vanstar Corp.
Vanstar Corp. ("Vanstar") is a provider of products and services to Fortune 1000
companies and other large enterprises which enable those customers to build,
manage and enhance their personal computer networks. This business combination
was accounted for as a pooling-of-interests combination and, accordingly, the
Company's supplemental consolidated financial statements have been restated to
include the accounts and results of Vanstar as if the companies had operated
together from the beginning of the earliest period presented.
The Company expects to record a material pre-tax charge following consummation
of the Vanstar merger to cover (1) the direct costs of the merger during the
first quarter of 1999 (including the fees of financial advisors, legal counsel,
and independent auditors), (2) the cost of integrating certain aspects of the
businesses of the Company and Vanstar, (3) the cost of canceling certain
purchase commitments, (4) the costs of employee terminations and facility
expenses to eliminate duplicative functions and locations, and (5) other merger
related items. This pre-tax charge is estimated to be in the range of $120 to
$155 million. The after-tax impact of this charge is estimated to be in the
range of $83 to $107 million. The estimated charges and nature of the costs
included therein as well as the periods in which these costs are recorded are
subject to change as the Company's integration plan is more fully developed and
more accurate estimates become available. The accompanying supplemental
consolidated financial statements do not reflect such charges.
Prior to the combination, Vanstar's fiscal year ended April 30. In recording the
pooling-of-interests combination, Vanstar's financial statements for the twelve
months ended December 26, 1998, were combined with the Company's financial
statements for the same period and Vanstar's financial statements for its years
ended April 30, 1998 and 1997 were combined with the Company's financial
statements for its fiscal years ended December 27, 1997 and December 28, 1996,
respectively. Vanstar's unaudited results of operations for the four months
ended April 30, 1998, included revenues of $942.0 million and net income of
$16.5 million. An adjustment has been made to stockholders' equity as of
December 26, 1998, to eliminate the effect of including Vanstar's results of
operations for the four months ended April 30, 1998, in both the years ended
December 26, 1998 and December 27, 1997.
In 1996, the Company acquired Mentor Technologies, Ltd., an Ohio limited
partnership ("Mentor Technologies") and Contract Data Services, Inc., a North
Carolina corporation ("CDS"). The total consideration given in 1996 for these
business combinations was 771,114 shares of common stock. These business
combinations were accounted for as poolings of interests and accordingly, the
Company's supplemental consolidated financial statements have been restated to
include the accounts and results of Mentor and CDS.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(2) BUSINESS COMBINATIONS (Continued)
In December 1996, the Company effected two additional 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 these business combinations. The Company recognized a non-recurring
charge of $1.0 million to net earnings related to the business combinations
during the fourth quarter of 1996. The effect of the non-material poolings was
to increase stockholders' equity by approximately $0.6 million in 1996.
In 1998, the Company completed several business combinations and made contingent
payments in relation to business combinations completed in 1998, 1997 and 1996.
The total consideration given in 1998 for business combinations, including
contingent payments, was $57.2 million in cash and 1,785,170 shares of common
stock. The excess purchase price over the estimated fair value of the net assets
acquired was $135.5 million in 1998; the excess is being amortized using the
straight-line method over twenty years. The business combinations accounted for
as purchases reflect the operations of the acquired entities since the
respective acquisition dates.
During 1997 and 1996 the Company completed several acquisitions in transactions
accounted for as purchases. The total consideration given for the 1997
acquisitions was $73.4 million in cash and 892,708 shares of common stock. The
total consideration given for the 1996 acquisitions was $61.1 million in cash
and 327,495 shares of common stock. The excess purchase price over the estimated
fair value of the net assets acquired was $95.8 million in 1997 and $37.9
million in 1996; the excess is being amortized using the straight-line method
over twenty years to twenty-five years.
In connection with certain acquisitions, the Company may be required to make
additional payments that are contingent upon the acquired businesses achieving
certain performance criteria. The Company made additional payments in 1998 of
$4.2 million in cash and 226,780 shares of common stock and additional payments
in 1997 of $2.3 million in cash and 76,800 shares of common stock. These
additional payments have been recorded as cost in excess of net assets of
businesses acquired.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(2) BUSINESS COMBINATIONS (Continued)
The following unaudited pro forma financial information presents the combined
results of operations of the Company as if the acquisitions described above for
1998 and 1997 accounted for as purchase transactions had occurred as of the
beginning of the year preceding the consummation of the transaction after giving
effect to certain adjustments. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company and the acquired entities constituted a single entity during such
periods.
- ---------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------
Revenues $6,931,836 $7,023,916 $5,706,330
Net Earnings (7,119) 63,376 45,260
Basic earnings per share ($0.16) $1.53 $1.18
Diluted earnings per share ($0.16) $1.46 $1.13
- ---------------------------------------------------------------------------------------
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment stated at cost is as follows:
- ----------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------
Land, buildings and improvements $48,538 $48,998
Furniture, fixtures and equipment 85,866 77,590
Computer equipment 189,057 162,263
Computer parts held for repair and exchange 55,831 63,387
- ----------------------------------------------------------------------------------------------------------
$379,292 $352,238
- ----------------------------------------------------------------------------------------------------------
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(4) RESTRUCTURING AND UNUSUAL CHARGES
In August 1998, the Company announced a program to reduce expenses in line with
expected revenue and industry dynamics. The program included both items that
qualify as restructuring costs as defined by Emerging Issues Task Force 94-3 and
other unusual charges. This program to reduce expenses included a reduction in
workforce and elimination of some of its facilities through consolidation during
the second quarter in accordance with approved management plans. The Company
also wrote-off equipment and systems associated with the support of certain
finance functions that were affected by the realignment of the business into two
operating units and the reduction of workforce. In addition, the Company
wrote-off redundant equipment and systems associated with the centralized
service dispatch and scheduling functions. The Company also liquidated excess
spare parts due to the centralization of its spare parts management and the
outsourcing of a substantial portion of its spare parts procurement and repair
to a single vendor. Restructuring and unusual charges totaled $45.3 million, of
which $39.1 million related to noncash charges such as duplicated facilities and
spare parts and software write-offs. The remaining $6.2 million related to cash
payments made to employees for incentives and severance.
Restructuring Charges
Restructuring charges of $12.0 million include the cost of facility closures and
consolidations, involuntary employee separation benefits, and related costs
associated with business realignment and restructuring actions in accordance
with approved management plans. Facility closure costs of $6.0 million include
future lease payments, costs to abandon or dispose of property and equipment and
capitalized software, net of estimates of sublease revenues and disposal values.
Employee separation benefits of $3.0 million include severance, medical, and
other benefits for approximately 250 permanent full-time employees. Reductions
occurred in virtually all areas of the Company. Business realignment costs
relate to the decision to exit the discrete training business as the Company
focuses on its core competencies as part of the realignment of the Company into
two distinct operating units, contract termination costs and other related costs
and are $3.0 million. There are no remaining restructuring reserves.
Unusual Charges
Unusual charges not qualifying as restructuring charges totaled $33.3 million,
of which $30.3 million are reflected in selling, general and administrative
expenses and $3.0 million are reflected in direct costs. These unusual charges
consist primarily of the write-off of certain equipment and capitalized
software, costs to liquidate excess spare parts and certain inventory
adjustments. Capitalized software and lease costs of $9.0 million include the
write-off of systems associated with the centralized dispatch and scheduling
functions and obsolete hardware and software due to the upgrade of call
technology implemented by the Company. The Company also liquidated excess spare
parts due to the centralization of its spare parts management and the
outsourcing of a substantial portion of its spare parts procurement and repair
to a single vendor, resulting in a net charge of $16.5 million. Inventory
adjustments of $5.4 million include costs associated with the early return of
certain inventory items to a major vendor in an effort to reduce interest
expense and additional inventory reserves to record inventory at lower of cost
or market due to the reduced price protection available from major vendors as
part of the supply chain reengineering. Other items of $2.4 million consist
primarily of the incentive pay to retain certain employees during the
restructuring activities and costs associated with the termination of certain
marketing commitments.
As the Company implements its strategic plan to respond to current industry
dynamics, there can be no assurance that additional restructuring actions will
not be required. In addition, there can be no assurance that the estimated costs
of the restructuring program will not change.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(5) INCOME TAXES
Income tax expense (benefit) consists of the following:
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Current:
Federal $21,514 $41,238 $10,095
State 4,695 6,679 1,588
Deferred:
Federal (2,502) (6,949) 15,528
State (870) (330) 1,924
- -------------------------------------------------------------------------------------------------
$22,837 $40,638 $29,135
- -------------------------------------------------------------------------------------------------
The above income tax expense is presented net of tax benefits related to
distributions on preferred securities of trust.
The reconciliation of the statutory federal income tax rate and the effective
tax rate are as follows:
- -------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Statutory federal income tax $4,997 $37,115 $26,836
State income taxes, net of federal benefit 2,486 4,127 2,958
Change in estimate related to prior year tax returns 12,651 - -
Other 2,703 (604) (659)
- -------------------------------------------------------------------------------------------------
$22,837 $40,638 $29,135
- -------------------------------------------------------------------------------------------------
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(5) INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
- -------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------
Deferred tax assets:
Valuation reserves $23,149 $22,866
Accrued expenses not deducted until paid 12,990 5,784
Other 3,383 3,893
- -------------------------------------------------------------------------------------------------
Total deferred tax assets 39,522 32,543
- -------------------------------------------------------------------------------------------------
Deferred tax liabilities
Vendor discounts 5,453 2,374
Depreciation 5,797 5,600
Other 1,777 1,446
- -------------------------------------------------------------------------------------------------
Total deferred tax liabilities 13,027 9,420
- -------------------------------------------------------------------------------------------------
Net deferred tax assets $26,495 $23,123
- -------------------------------------------------------------------------------------------------
There was no valuation allowance for deferred tax assets at December 26, 1998 or
December 27, 1997.
(6) DEBT
A summary of debt follows:
- ----------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------
Notes payable $236,500 $308,351
Obligations under capital leases 3,770 7,479
Convertible subordinated debentures 141,500 141,500
Other - 658
- ----------------------------------------------------------------------------------------------------------
Total outstanding debt 381,770 457,988
Less current maturities 179,829 314,151
- ----------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $201,941 $143,837
- ----------------------------------------------------------------------------------------------------------
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(6) DEBT (Continued)
The Company's primary sources of liquidity are provided through a $350.0 million
line of credit under a financing agreement with IBMCC, a senior secured
revolving credit facility with Deutsche Bank of up to $250.0 million, and asset
securitization programs with JP Morgan and Nesbitt Burns aggregating up to
$425.0 million (see Note 7 to Supplement Consolidated Financial Statements
Accounts Receivable and Credit Arrangements). Capital resources also include
$201.3 million in Company-obligated mandatorily redeemable convertible preferred
securities of a subsidiary trust holding solely convertible subordinated debt
securities of the Company (see Note 8 to Supplement Consolidated Financial
Statements - Preferred Securities of Trust) and $141.5 million of convertible
subordinated debentures.
As a result of the February 1999 merger between InaCom and Vanstar, all amounts
outstanding under the $350.0 million financing agreement, the $250.0 million
senior secured revolving credit facility, and the $425.0 million asset
securitization programs became immediately due and payable. The Company has
received written waivers precluding such debt acceleration under each of the
agreements from the parties to these agreements. In addition, as a result of the
merger, the Company will give notice to the holders of $141.5 million of
convertible subordinated debentures that a holder can require the Company to
repurchase such holder's debentures at 100% of the principal amount plus accrued
and unpaid interest in cash or stock. The holders may only exercise such
repurchase option during the 30-day period following the date of the notice.
On December 26, 1998, the Company had $247.4 million outstanding under its
facility with IBMCC, of which $70.9 million was included in accounts payable and
$176.5 million was classified as short-term borrowings. Borrowings under the
line of credit are subject to certain borrowing base limitations and are secured
by portions of the Company's inventory, accounts receivable, and certain other
assets. On December 26, 1998, amounts borrowed under the line of credit carried
an interest rate of 6.8% based on LIBOR. The line of credit expires March 31,
1999. The Company presently plans to allow this line of credit to expire, and to
replace the interest-bearing working capital portion with the senior secured
bank facility and to transfer the non-interest bearing floor planning portion to
the Company's existing $400.0 million floor planning facility with IBMCC.
The senior secured revolving credit facility, which expires in April 2002, was
entered into in April 1998 for $200.0 million and was increased in August 1998
to $250.0 million. Certain inventory and assets of the Company secure this
facility. On December 26, 1998, $60.0 million was outstanding under this
facility with an interest rate of 6.6% based on LIBOR. The amounts outstanding
under this facility have been classified as long-term debt based on the terms of
the agreement.
The $141.5 million of convertible subordinated debentures consists of $86.25
million of 4.5% convertible subordinated debentures issued in November 1997 and
$55.25 million of 6.0% convertible subordinated debentures issued in June 1996.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(6) DEBT (Continued)
The 1997 debentures are due November 1, 2004 and are convertible into common
stock of the Company at a conversion rate of 25.235 shares per each $1,000
principal amount of debentures (equivalent to a conversion price of $39.63 per
share), subject to adjustments under certain circumstances. The 1997 debentures
are not redeemable by the Company prior to November 1, 2001; thereafter the
Company may redeem the debentures at various premiums to principal amount. The
1997 debentures may also be redeemed at the option of the holder 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 merger
between InaCom and Vanstar is a Change in Control. As a result, the Company will
give notice to the holders of the 1997 debentures that a holder can require
InaCom to repurchase such holder's debentures at 100% of the principal amount
plus accrued and unpaid interest. The holders may only exercise such repurchase
option during the 30-day period following the date of the notice. Subject to
certain conditions, InaCom will either pay the repurchase price in cash or in
InaCom common stock valued at 95% of the average of the closing prices of InaCom
common stock for a five trading day period ending on the third trading day
preceding the repurchase date.
The 1996 debentures are due June 15, 2006 and are convertible into common stock
of the Company at a conversion price of $24.00 per share, subject to adjustments
under certain circumstances. The 1996 debentures are not redeemable by the
Company prior to June 16, 2000; thereafter the Company may redeem the debentures
at various premiums to principal amount. The 1996 debentures may also be
redeemed at the option of the holder 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 merger between InaCom and Vanstar is a
Change in Control. As a result, the Company will give notice to the holders of
the 1996 debentures that a holder can require InaCom to repurchase such holder's
debentures at 100% of the principal amount plus accrued and unpaid interest. The
holders may only exercise such repurchase option during the 30-day period
following the date of notice.
The 1997 and 1996 debentures have been classified as long term debt because the
Company has the ability and intent to refinance the debentures under the
long-term senior secured revolving credit facility or the debentures will be
repaid in the Company's common stock.
Aggregate maturities of long-term debt for the next five years are as follows:
$179.8 million in 1999; $0.3 million in 2000; $0.1 million in 2001; $201.5
million in 2002 and $0.0 million in 2003.
(7) ACCOUNTS RECEIVABLE AND CREDIT ARRANGEMENTS
The Company currently has two separate asset securitization programs which
allows for funding of up to $250.0 million and $175.0 million, respectively. The
agreements are with two separate, unrelated financial institutions and the
Company, through separate, non-consolidated wholly-owned special purpose
corporations. In connection with these asset securitization programs, the
Company sells on a revolving basis, certain pooled receivables to special
purpose corporations which in turn sells a percentage ownership interest in the
pooled receivables to a commercial paper conduit sponsored by two separate
financial institutions. These transactions have been recorded as a sale in
accordance with Statement of Financial Accounting Standards (SFAS) No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The Company is retained as servicer of the pooled receivables.
Although management believes that the servicing revenues earned will be adequate
compensation for performing the services, estimating the fair value of the
servicing asset was not considered practicable. Consequently, a servicing asset
has not been recognized. The gross proceeds resulting from the sale of the
percentage
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(7) ACCOUNTS RECEIVABLE AND CREDIT ARRANGEMENTS (Continued)
ownership interests in the pooled receivables totaled $406.0 million as of
December 26, 1998 and $374.6 millions as of December 27, 1997. The proceeds are
reflected as a reduction in accounts receivable. Changes in the amount of pooled
receivables sold are included in cash flows from financing activities in the
consolidated statements of cash flows. Upon the February 17, 1999 consummation
of the merger between Inacom and Vanstar, all amounts outstanding under the
asset securitization agreements were accelerated and immediately due. Prior to
the consummation of the merger, the Company received written waivers from the
parties to the agreements. On December 26, 1998, the implicit interest rate on
the receivable sale transactions were 5.7% and 5.5%.
The Company also has floor plan agreements to take advantage of vendor financing
programs. 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 $1.0 million on December 26, 1998 and $2.4 million on December
27, 1997 relating to these agreements.
(8) CONVERTIBLE PREFERRED SECURITIES OF TRUST
During 1996, the trust, of which the Company owns all of the common trust
securities, issued 4,025,000 preferred securities. The preferred securities have
a liquidation value of $50 per security and are convertible at any time at the
option of the holder into shares of InaCom common stock at a conversion rate of
1.113 shares for each preferred security, subject to adjustment in certain
circumstances. Distributions on preferred securities accrue at an annual rate of
6 3/4% of the liquidation value of $50 per preferred security and are included
in "Distributions on convertible preferred securities of trust, less income
taxes" in the consolidated statements of income. The proceeds of the private
placement, which totaled $194.4 million (net of initial purchasers' discounts
and offering expenses totaling $6.9 million) are classified as Company-obligated
mandatorily redeemable convertible preferred securities of a subsidiary trust
holding solely convertible subordinated debt securities of the Company on the
supplemental consolidated balance sheets. The Company has entered into several
contractual arrangements (the "Back-up Undertakings") for the purpose of fully
and unconditionally supporting the trust's payment of distributions, redemption
payments and liquidation payments with respect to the preferred securities.
Considered together, the Back-up Undertakings constitute a full and
unconditional guarantee by the Company of the trust's obligations on the
preferred securities.
The trust invested the proceeds of the offering in the debentures issued by the
Company. The debentures bear interest at 6 3/4% per annum, generally payable
quarterly on January 1, April 1, July 1 and October 1. The debentures are
redeemable by the Company, in whole or in part, on or after October 5, 1999 at
designated redemption prices. If the Company redeems the debentures, the trust
must redeem the preferred securities on a pro rata basis having an aggregate
liquidation value equal to the aggregate principal amount of the debentures
redeemed. The sole assets of the trust are the debentures, which have an
aggregate principal amount of $207.5 million. The debentures and related income
statement effects are eliminated in the Company's supplemental consolidated
financial statements.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(9) COMPREHENSIVE INCOME
Effective for the year ended December 26, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income in a full set of general purpose financial statements,
however, the adoption of this statement has no impact on the Company's net
income or stockholders' equity. Comprehensive income includes net income plus
items that, under generally accepted accounting principles, are excluded from
net income and are reflected as a component of equity, such as currency
translation adjustments and unrealized gains and losses on available-for-sale
securities. SFAS No. 130 also requires the accumulated balance of other
comprehensive income to be displayed separately from retained earnings and
additional paid-in capital in the equity section of the statement of financial
position. Prior period financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
- ------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------
Unrealized (losses) on securities ($2,351) ($207)
Foreign currency translation adjustments (129) (167)
- ------------------------------------------------------------------------------------------------------
Accumulated other comprehensive (loss) ($2,480) ($374)
- ------------------------------------------------------------------------------------------------------
The components of comprehensive income are presented net of related income tax.
The tax benefit related to other comprehensive income (loss) items was $0.4
million and $0.7 million in 1998 and 1997, respectively. The tax benefit related
primarily to the unrealized loss on available for sale securities.
(10) LEASES
The Company leases certain premises which include the general offices, warehouse
facilities and Company-owned branches, and equipment under a combination of
operating and capital leases. Operating lease terms range from monthly to ten
years and generally provide for renewal options.
Rent expense for operating leases was approximately $48.2 million, $41.4
million, and $31.5 million for the three years ended December 26, 1998,
respectively.
Future minimum operating lease obligations for the years 1999 through 2003 are
$32.6 million, $27.2 million, $21.5 million, $16.8 million, and $12.5 million,
respectively. It is anticipated that leases will be renewed or replaced as they
expire such that future annual lease obligations will approximate rent expense
for 1998.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(11) EMPLOYEE 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.
The Company makes annual contributions to the qualified plan, based on
participants' annual pay. Participants may also elect to make contributions to
the plan. The Company matches employee contributions up to limits prescribed by
the IRC. Company contributions to the plan approximated $9.0 million in 1998,
$7.2 million in 1997, and $4.6 million in 1996.
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.
(12) LITIGATION
On July 3, 1997, a trust claiming to have purchased shares of Vanstar common
stock filed suit in Superior Court of the State of California. The suit is
entitled O'Neal Trust v. Vanstar Corporation, et al., Case No. CV767266. On
January 21, 1998, the same plaintiff along with others claiming to have
purchased shares of Vanstar common stock, filed suit in the United States
District Court for the Northern District of California, making allegations
virtually identical to those in the earlier suit. The recent suit is captioned
O'Neal Trust, et al. v. Vanstar Corporation, et al., Case No. C-98-0216 MJJ.
Both suits named as defendant Vanstar and certain former directors and officers
of Vanstar. The complaints in both suits generally allege, among other things,
that the defendants made false or misleading statements or concealed information
regarding Vanstar and that the plaintiffs, as holders of the Vanstar common
stock, suffered damage as a result. The plaintiffs in both suits seek class
action status, purporting to represent a class of purchasers of Vanstar common
stock between March 11, 1996 and March 14, 1997, and seek damages in an
unspecified amount, together with other relief. The complaint in the first suit
purports to state a cause of action under California law; the complaint in the
recent suit purports to state two causes of action under the Securities Exchange
Act of 1934. On July 23, 1998, the California Superior Court dismissed the state
court complaint as to certain defendants. The Company believes that the
plaintiffs' allegations in both suits are without merit and intends to defend
the suits vigorously. The ultimate outcome of this matter is not presently
determinable.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. Management believes that the ultimate resolution of
all matters will not have a material adverse effect on the Company's
consolidated financial statements.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(13) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Financing expenses and income taxes paid are summarized as follows:
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Financing expenses paid $ 66,485 $ 60,259 $ 40,982
Distributions on preferred securities of Trust 13,584 13,584 6,943
Income taxes paid $ 35,255 $ 25,603 $ 11,562
- ----------------------------------------------------------------------------------------------
Components of cash used for acquisitions as reflected in the consolidated
statements of cash flows are summarized as follows:
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
Fair value of assets acquired, including goodwill $ 146,563 $ 179,546 $ 88,854
Liabilities assumed (35,384) (106,052) (22,092)
Fair value of common stock issued (53,968) (24,483) (6,650)
- ----------------------------------------------------------------------------------------------
Cash paid, net of cash acquired $ 57,211 $ 49,011 $ 60,112
- ----------------------------------------------------------------------------------------------
(14) STOCK OPTION AND AWARD PROGRAMS
Prior to January 1, 1996, the Company accounted for its stock option plans 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 1998, 1997 and 1996. In 1996, the Company adopted SFAS 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. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net earnings
and pro forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined in SFAS
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 SFAS No. 123.
The Company has three stock plans approved by the shareholders in 1997, 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 two to five years, and the
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(14) STOCK OPTION AND AWARD PROGRAMS (Continued)
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.
On December 26, 1998, the Company had approximately 780,000 shares available for
issuance pursuant to subsequent grants under the plans. On February 17, 1999,
the 1997 stock plan was amended in conjunction with the shareholder approval of
the Vanstar merger agreement. The amendment increased the amount of shares
issuable under the 1997 plan by 10.0 million shares, of which approximately 3.8
million shares were used to convert Vanstar options assumed in the merger.
Additional information as to shares subject to options is as follows:
- -----------------------------------------------------------------------------
Number of Weighted Average
Options Exercose Price
- -----------------------------------------------------------------------------
Options outstanding at December 30, 1995 3,241,880 $8.58
Granted 1,032,980 $22.69
Exercised (515,080) $8.43
Canceled (217,480) $9.49
- -----------------------------------------------------------------------------
Options outstanding at December 28, 1996 3,542,300 $12.66
Granted 1,839,270 $22.46
Exercised (229,140) $8.87
Canceled (516,720) $14.22
- -----------------------------------------------------------------------------
Options outstanding at December 27, 1997 4,635,710 $16.56
Granted 594,440 $22.09
Exercised (123,010) $10.26
Canceled (182,745) $23.82
- -----------------------------------------------------------------------------
Options outstanding at December 26, 1998 4,924,395 $16.65
- -----------------------------------------------------------------------------
Exercisable at December 26, 1998 2,814,914 $14.12
- -----------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Options Outstanding at December 26, 1998 Exercisable at December 26, 1998
---------------------------------------------------- ------------------------------------
---------------------------------------------------- ------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Option Number of Remaining Exercise Price Number of Exercise Price
Exercise Price Options Contractual Life Per Option Options Per Option
- ----------------------- ---------------------------------------------------- ------------------------------------
- ----------------------- ---------------------------------------------------- ------------------------------------
$.28 to 8.00 1,685,417 4.55 Years $ 5.52 1,450,817 $ 5.67
8.00 to 15.63 1,326,750 6.60 Years 13.62 638,728 13.14
15.83 to 37.30 1,912,228 8.23 Years 25.04 725,369 25.42
- ----------------------- ---------------------------------------------------- ------------------------------------
- ----------------------- ---------------------------------------------------- ------------------------------------
$.28 to 37.30 4,924,395 6.79 Years $ 16.65 2,814,914 $ 14.12
- -------------------------------------------------------------------------------------------------------------------
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(14) STOCK OPTION AND AWARD PROGRAMS (Continued)
Stock Purchase Plan
The Company provided an employee stock purchase plan (the "Stock Purchase Plan")
allowing eligible employees to purchase shares of common stock. The Stock
Purchase Plan was intended to qualify as an employee stock purchase plan under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The
total number of shares of common stock authorized for issuance under the plan
was 640,000. All full-time employees of the Company were eligible to
participate, subject to certain limited exceptions. The Stock Purchase Plan
provided a means for the Company's employees to purchase stock through payroll
deductions of up to 10% of their gross compensation. The purchase price for
shares offered under the Stock Purchase Plan was equal to 85% of the lower of
the closing price of the common stock on the first or last day of the six month
offer period. During fiscal year 1998 and 1997, the Company sold 260,000 and
249,000 shares, respectively, of common stock under the Stock Purchase Plan. The
Stock Purchase Plan was terminated on January 31, 1999.
Pro-forma Information
Pro-forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The
following weighted-average fair values for these options were estimated at the
date of grant using a Black-Scholes option-pricing model with these
weighted-average assumptions for 1998, 1997 and 1996:
- ------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------
Fair Value of Options Granted During the Year $ 7.85 $ 14.47 $ 8.54
Risk-free Interest Rate 5.4% 5.9% 6.1%
Expected Dividend Yield 0.0% 0.0% 0.0%
Expected Volatility Factor 71.0% 83.0% 82.0%
Expected Life 2.3 years 2.8 years 2.3 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 supplemental
consolidated financial statements. Had the Company recorded compensation cost
based on the fair value at the grant date for its stock options under SFAS
Statement No 123, the Company's net earnings (loss) for 1998, 1997 and 1996
would have been increased (reduced) by approximately 106.0 %, (11.7%), and
(13.4%), respectively, and the Company's diluted earnings (loss) per share for
1998, 1997 and 1996 would have been increased (reduced) by approximately 111.4%,
(14.5%), and (14.9%), respectively.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(14) STOCK OPTION AND AWARD PROGRAMS (Continued)
Pro forma net income reflects only options granted in 1998, 1997, 1996, and
1995. Therefore, the full impact of calculating compensation cost for stock
options under SFAS Statement No. 123 is not reflected in the pro forma net
earnings amounts presented above, because compensation cost is reflected over
the options' vesting periods for the 1998, 1997, 1996 and 1995 options,
respectively. Compensation costs for options granted prior to January 1, 1995
are not considered.
Vanstar options, converted to InaCom options following the February 1999 merger,
and per share prices are reported pursuant to the 0.64 to 1.0 exchange ratio as
specified in the merger agreement for all periods presented.
(15) SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", in 1998 which changes the way the Company
reports information about its operating segments. The information for 1997 and
1996 is presented to conform to the 1998 presentation. The Company has various
management teams and infrastructures which offer different products and
services. The Company has identified two reportable segments: products and
services. The product segment includes the sales of desktops, laptops, servers,
monitors, printers, operating systems software, phone systems, voice mail, voice
processing, data network equipment and multiple small office-home offerings. The
services segment includes sales of integrated life cycle services which
encompasses: technology planning, procurement, integration, support, and
management. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(15) SEGMENT INFORMATION (Continued)
Summarized financial information concerning the Company's reportable segments is
shown in the following table. The "Other" column includes corporate related
items and items which cannot practicably be identified within a business unit to
a reportable segment.
- -------------------------------------------------------------------------------------------------------
Product Services Other Total
- -------------------------------------------------------------------------------------------------------
1998
Revenues $ 6,018,823 $868,591 - $ 6,887,414
Segment earnings before taxes (3,608) 31,469 - 27,861
Total assets 1,195,933 280,762 404,289 1,880,984
Total current liabilities 635,318 68,174 274,175 977,667
- -------------------------------------------------------------------------------------------------------
1997
Revenues 5,993,536 741,568 - 6,735,104
Segment earnings before taxes 77,208 42,758 - 119,966
Total assets 1,490,468 278,966 283,065 2,052,499
Total current liabilities 702,574 59,025 417,991 1,179,590
- -------------------------------------------------------------------------------------------------------
1996
Revenues 4,809,590 507,251 - 5,316,841
Segment earnings before taxes 47,030 37,682 - 84,712
Total assets 1,202,440 277,190 129,393 1,609,023
Total current liabilities $ 629,696 $ 69,734 $305,892 $ 1,005,322
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
Notes to Supplemental Consolidated Financial Statements Three-year period ended
December 26, 1998 (Columnar dollar amounts in thousands, except per share data)
(16) EARNINGS PER SHARE
Basic earnings per share are computed using the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per share
are computed using the weighted average number of shares of common stock
outstanding and dilutive potential common stock outstanding during the period.
The earnings per share calculation is as follows:
- ----------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Net earnings ($8,560) $65,403 $47,540
-------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 43,900 39,500 37,500
-------------------------------------------------------------------------------------------------------
Basic earnings per share ($0.19) $1.66 $1.27
- ----------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share
Net earnings ($8,560) $65,403 $47,540
Net after-tax interest savings on convertible subordinated debentures - 2,271 1,057
-------------------------------------------------------------------------------------------------------
Net earnings used in diluted earnings per share calculation (8,560) 67,674 48,597
-------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 43,900 39,500 37,500
Common equivalent shares from stock options and
convertible subordinated debentures - 3,500 2,500
-------------------------------------------------------------------------------------------------------
Shares used in diluted earnings per share calculation 43,900 43,000 40,000
-------------------------------------------------------------------------------------------------------
Diluted earnings per share ($0.19) $1.57 $1.21
- ----------------------------------------------------------------------------------------------------------
1998 diluted earnings per share equals basic earnings per share. As a result of
the net loss, calculating diluted earning per share by adding back the net
after-tax interest savings and including the dilutive potential common shares
would have resulted in diluted earnings per share being anti-dilutive.
Vanstar shares are reported pursuant to the 0.64 to 1.0 exchange ratio as
specified in the February 1999 merger for all periods presented.
SCHEDULE
INACOM CORP. AND SUBSIDIARIES (Includes Retroactive Impact of Vanstar Merger)
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
- ------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning Cost and Amounts Balance at
of Period Expenses Written Off End of Period
- ------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 26, 1998
Allowance for Doubtful Accounts $14,203 $6,164 $4,986 $15,381
Fiscal Year Ended December 27, 1997
Allowance for Doubtful Accounts 12,637 4,744 3,178 14,203
Fiscal Year Ended December 28, 1996
Allowance for Doubtful Accounts 18,349 (1,079) 4,633 12,637
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning Cost and Amounts Balance at
of Period Expenses Written Off End of Period
- ------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 26, 1998
Inventory Reserve $14,273 $9,637 $4,648 $19,262
Fiscal Year Ended December 27, 1997
Inventory Reserve 15,739 3,205 4,671 14,273
Fiscal Year Ended December 28, 1996
Inventory Reserve 15,222 5,791 5,274 15,739
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Balance at Charged to
Beginning Cost and Amounts Balance at
of Period Expenses Written Off End of Period
- ------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 26, 1998
Restructuring Reserve $- $12,009 $12,009 $-
Fiscal Year Ended December 27, 1997
Restructuring Reserve - - - -
Fiscal Year Ended December 28, 1996
Restructuring Reserve - - - -
- ------------------------------------------------------------------------------------------------------
See accompanying auditors' report.
INDEX TO EXHIBITS
Exhibit
3.1 InaCom Certificate of Incorporation as amended to date.
3.2 InaCom Bylaws as amended to date.
4.1 Registration Rights Agreement between InaCom Corp. and Warburg, Pincus
Capital Company, L.P. dated as of October 8, 1998.
4.2 Indenture dated as of October 2, 1996 between Vanstar Corporation as
issuer and Wilmington Trust Company as trustee.
4.3 Form of 6 3/4% Preferred Securities.
4.4 Form of 6 3/4% Convertible Subordinated Debentures Due 2016.
4.5 First Supplemental Indenture dated as of February 17, 1999 to
Indenture dated as of October 2, 1996.
10.1 Separation, Consulting and Noncompetition Agreement dated October 8,
1998 between InaCom Corp. and William Y. Tauscher.
12 Statement re: Ratio of Earnings to Fixed Charges
23.1 Consent of KPMG Peat Marwick LLP.
23.1 Consent of Ernst & Young LLP.
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.
27.3 Financial Data Schedule.
99.1 Fiscal Year-End Financial Statement of Business Acquired.
99.2 Quarter-End Financial Statements of Business Acquired.
99.3 Pro Forma Financial Information.