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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark one)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 30, 1995 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NO. 0-16114
INACOM CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0681813
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) Identification No.)
10810 FARNAM, OMAHA, NEBRASKA 68154
(Address of principal executive
offices) (Zip Code)
Registrant's phone number, including area code: (402) 392-3900
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EXCHANGE
TITLE OF EACH ON WHICH
CLASS REGISTERED
- ---------------- ------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
InaCom Corp. Common Stock $.10 Par Value-Traded OTC (Symbol INAC)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on March 1, 1996 as
reported on NASDAQ National Market System, was approximately $171,865,000.
At March 1, 1996 there were outstanding 10,024,211 common shares of the
Company.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 1996 Annual Meeting of
Stockholders are incorporated by reference in Part III of this Form 10-K Report.
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PAGE 1 OF 62
INDEX TO EXHIBITS, PAGE 35
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION OF BUSINESS
InaCom Corp., a Delaware corporation ("Inacom" or the "Company") is a
leading provider of technology management services which includes technology
procurement services such as distribution of information technology products,
including microcomputer systems, workstations, networking and telecommunications
equipment; system support services; and systems integration services. The
Company distributes such products and services through a network of 1,017
business centers located throughout the United States. At December 30, 1995, the
business centers included 45 business centers owned and operated by the Company
and 972 reseller channel locations comprised of independently owned business
centers. Through Inacom Communications the Company delivers voice, data and
video convergence equipment. The Company emphasizes tailored solutions to
computer and tele-communications needs of business and professional customers
and provides its customers with comprehensive consulting, training, technical
support and service.
The Company currently distributes products for leading manufacturers such as
IBM, COMPAQ, Hewlett-Packard, Toshiba, Apple, NEC, Epson, Okidata, Lexmark,
AT&T, NCR, Novell, Banyan, Microsoft, Oracle, 3Com, SynOptics, SCO and Network
General.
The Company has been engaged in the distribution of microcomputer products
and services since October 1982. The Company was established as a division of
Valmont Industries, Inc. ("Valmont") in 1982 and became a wholly-owned
subsidiary of Valmont in March 1985 under the name ValCom, Inc. The Company
completed an initial public offering of its common stock in 1987 and changed its
name to InaCom Corp. in 1991.
The Company has effected two significant acquisitions in the past five
years. The Company acquired Inacomp Computer Centers, Inc. in a 1991 merger for
$53.9 million in cash and stock; Inacomp had revenues of $516.0 million in its
fiscal year preceding the merger from 322 business center locations. In 1993,
the Company purchased certain assets of Sears Business Centers ("SBC") from
Sears, Roebuck and Co. ("Sears"). The cost of the acquired assets was
approximately $5.8 million for 35 former SBC locations which generated
approximately $456 million of revenue for Sears in 1992.
The Company has traditionally reported operating results based on revenues
and earnings from Company-owned and independent reseller channels. In 1995 the
Company began a process of evaluating its revenues and earnings from the
services provided through the life cycle of the products it sells. The Company
offers technology management services to all of the customers it serves.
Technology management services consist of technology procurement, support
services and system integration.
PRODUCTS AND SERVICES
The Company provides a variety of services ranging from procurement of
product; support services such as help desk, training and maintenance; and
system integration services such as consulting, design, implementation and
monitoring.
As a result of its quantity purchasing capability, the Company generally
obtains volume discounts from its vendors, thus enabling it to sell products to
independently owned or Company-owned business centers on a more favorable basis
than such business centers could attain on their own. Independently owned
business centers are not contractually obligated to the Company to purchase
their full product requirements from the Company.
The Company's program of hardware maintenance service and support enables
business centers to provide customers with on-site support and service coverage
at multiple locations. The program is supported by central service dispatch and
service call tracking. The Company uses Logistics Management Inc., an
unaffiliated entity, based in Memphis, Tennessee, for the distribution and
management of its repair parts.
2
The Company offers its distribution channel a direct interactive
communications on-line system through the use of a series of IBM AS400's
utilizing multiple local-area and wide-area communications networks. The on-line
system provides access to a complete range of services and data including
product availability, price lists, automatic quotes, order entry, order status
and electronic mail. The system saves both the Company and the business centers
time and money through lower cost communication and more effective utilization
of personnel. The Company believes that the on-line communication services
provide a competitive advantage in recruiting new business centers.
The Company offers the business centers toll-free hotline support to
professionals that manage computer networks operating on a variety of network
environments, including Novell, Banyan, Microsoft, IBM, Apple and SCO. The
hotline support program has a wide range of telephone support options. The
design of the central telephone support center gives the business center and the
customers a single point of contact on all technical issues. Customers have
access to the Company's on-line data base and technical support information and
the Company's Communications Research Center. Customers may choose from a wide
variety of technical support options, depending upon which is most effective for
their business.
In its configuration centers, the Company assembles or modifies
independently produced products to meet the customers' needs. Through its
"Direct Express" program the Company ships the configured product directly to
the ultimate customer rather than to a reseller location. The Direct Express
program provides independently owned business centers benefits in the form of
lower freight costs, reduced working capital requirements, and reduced support
staff required to handle and configure products at local levels. Customers
benefit from improved delivery times and standardized quality configuration. All
configuration is performed by the Company at three configuration centers located
in California, New Jersey and Nebraska.
To assist business centers and the customers with the purchase of products
and services, the Company provides several types of finance programs that offer
a wide range of services. The most traditional method of financing for qualified
business centers is 30 day interest free financing from the date that the
product is shipped; after this period, the business center has the option to
roll over the outstanding amounts into financing through various financial
institutions. Other programs and promotions are designed to meet business
centers and customer needs as market and business conditions change.
DISTRIBUTION NETWORK
At December 30, 1995, the Company's network of business centers consisted of
business centers owned and operated by the Company and the reseller channel
comprised of independently owned business centers.
The following table sets forth information with respect to the number of
business centers participating in the Company's distribution network:
FISCAL YEAR ENDED DECEMBER
-----------------------------------------------------
BUSINESS CENTERS 1995 1994 1993 1992 1991
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
Company-owned................................................ 45 46 53 50 52
Independent reseller channel................................. 972 1,316 1,417 1,152 780
--------- --------- --------- --------- ---
Total.................................................... 1,017 1,362 1,470 1,202 832
--------- --------- --------- --------- ---
--------- --------- --------- --------- ---
The decrease in the number of independent resellers in 1995 and 1994
resulted from actions taken by the Company to tier the independent reseller
channel into various categories due to the varying cost levels associated with
conducting business with different size resellers. As a result of this process
some of the smaller dealers in the independent reseller channel chose other
sources for product procurement due to the decreased service levels and
subsequent increased pricing. The loss of these independent resellers did not
have a material negative impact on revenue during 1995 nor 1994.
3
The Company-owned business centers provide a variety of computer products
and technology management services which include technology procurement
services, systems integration services and support services.
The Company's independent reseller channel consists of franchisees, systems
integrators and value added resellers. Franchisees operate computer stores and
typically pay the Company (i) a base monthly royalty and/or (ii) the purchase
price plus markup of the product and services acquired from the Company.
Contracts for franchisees are for a period of up to 10 years with certain
options for renewal. System integrators and value added resellers operate
businesses that focus on higher service levels providing customers with
installation and support of networks, business applications and program design.
The term of agreements within these groups range from 1 month to 5 years and the
agreements specify the products that may be purchased. Products are typically
purchased at a cost plus a volume based fee with varying levels of support
services provided by the Company on a fee basis.
The Company's communications division, which operates through Company-owned
business centers and independent resellers, provides a variety of voice, data
and telephony products and related services.
VENDORS
The Company has negotiated purchase arrangements, including price, delivery,
training and support, directly with certain vendors. During the fiscal year
ended December 30, 1995, sales of IBM, COMPAQ and Hewlett-Packard products
accounted for approximately 22%, 20% and 15%, respectively, of the Company's
revenues.
The IBM supply agreement is in effect for an indefinite period; however, IBM
may terminate the agreement on 90 days' written notice to the Company, or
immediately upon notice in the event of a breach. The distributor agreements
with other suppliers, including COMPAQ and Hewlett-Packard, may be terminated by
the supplier upon prior written notice, which generally ranges from 30 to 60
days. The Company believes that the terms and provisions offered by the vendors
are standard in the computer reseller industry.
The agreements with vendors generally contain provisions with respect to
product cost, price protection, returns and product allocations. The Company is
entitled to price protection with all major vendors on eligible product in the
Company's inventory in the event of price reductions made by a vendor.
Additionally, contracts with most vendors provide for the return for credit of
slower moving product or overstock product.
Certain vendors sponsor payment programs with several financial service
organizations to facilitate product sales through the business centers. These
programs provide the business centers with extended credit terms and interest
free financing for a period of time. Under these programs the Company receives
payments for product sales within three days, which reduces the working capital
requirements of the Company.
The primary vendors of the Company provide various incentives for promoting
and marketing their product offerings. Funds received by the Company are based
either on the sales of the vendor's products through the independent reseller
and Company-owned channels, or on the Company's purchases from the respective
vendor. These funds from the Company's primary vendors typically range from 1%
to 3% of purchases. The funds are earned through performance of specific
marketing programs or upon completion of objectives outlined by the vendors. The
three major forms of vendor incentives received by the Company are coop funds,
market development funds and vendor rebates. Coop funds are earned based upon
the sale of the vendor's products and generally must be utilized to offset the
costs associated with advertising and promotion pursuant to programs established
by the respective vendor. Market development funds are earned based upon the
Company's purchases from the vendor and generally must be used for market
development activities approved by the respective vendor. Vendor rebates are
based upon the Company attaining purchase volume targets established with the
vendor. Rebates generally can be used at the Company's discretion.
4
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, including IBM, COMPAQ, and
Hewlett-Packard. Although the Company considers its relationships with its key
vendors to be good, there can be no assurance that these relationships will
continue as presently in effect or that changes in marketing by one or more such
key vendors and the volume discount schedules or other programs applicable to
the Company and other purchasers would not adversely affect the Company.
Termination of, or a material change to, or a nonrenewal of the Company's
agreements with IBM, COMPAQ and Hewlett-Packard, 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.
SERVICE MARK AND TRADEMARK
The Company holds United States service mark and trademark registrations for
the marks "Inacom", "ValCom" and "Inacomp". The Company also has certain state
registrations. The Company claims common law rights to the marks based on
adoption and use. To the Company's knowledge, there are no pending interference,
opposition or cancellation proceedings, or litigation threatened or claimed,
with respect to the marks in any jurisdiction.
GOVERNMENT REGULATION
The Company is subject to a substantial number of state laws regulating
franchise relationships. The Company is also subject to Federal Trade Commission
rules governing disclosure requirements in the granting of franchises. Such laws
generally impose registration and/or disclosure requirements on the Company in
the offer and sale of franchises and also regulate related advertisements. The
Company believes it is in substantial compliance with all such regulations.
SEASONAL FACTORS IN BUSINESS
The fourth quarter of the Company's fiscal year generally produces higher
revenues, due principally to year-end purchases made by business customers.
CUSTOMERS
The Company is not dependent for a material part of its business upon a
single or a few customers and loss of any one customer would not have a material
adverse effect on the Company's financial condition.
BACKLOG
The backlog of orders for products distributed by the Company was $35.5
million at the close of the 1995 fiscal year compared to $43.8 million at year
end 1994 and $98.4 million at year end 1993. The decrease in backlog of orders
is primarily due to the increase in availability of products from the Company's
major vendors. Such orders are not necessarily firm since large customers may
place orders with several computer resellers and accept products from the first
computer reseller to provide delivery.
COMPETITION
All aspects of the information technology industry are highly competitive.
The Company's distribution network competes for potential customers, including
national accounts, with numerous other master resellers and distributors.
Several manufacturers have expanded their channels of distribution, pricing and
product positioning and compete with the Company's distribution network for
potential customers. Additionally, several manufacturers during 1994 lessened or
eliminated requirements upon independent resellers to purchase products from a
single source resulting in "open sourcing" of their products; previously,
manufacturers had typically required independent resellers having contractual
relationships with the Company to purchase their products from the Company.
Certain competitors and manufacturers are substantially larger than the Company
and may have greater financial, technical, service and marketing resources.
Other competitors operate mail-order or
5
discount stores offering clones of major vendor products. The Company's
distribution network competes primarily on the basis of professionalism and
customer contact, quality of product line, availability of products, service,
after-sale support, price, and quality of end-user training. The Company also
competes with other information technology sellers in the recruitment and
retention of franchisees and independently-owned resellers.
The computer manufacturers' expansion of their channels of distribution
including direct distribution, open sourcing, employment of selective resellers,
pricing and product positioning has put pressure on hardware gross margins. The
Company believes its ability to deliver technology management services which
consist of technology procurement services, systems integration services and
support services provides its customer base with value added services that will
differentiate the Company from alternative distribution channels and will
mitigate the impact of added competitive pressures caused by economic conditions
and manufacturers' continuing expansion of their channels of distribution,
pricing and product positioning.
The level of future sales and earnings achieved by the Company in any period
may be adversely affected by a number of competitive factors, including an
increase in direct sales by manufacturers to independent resellers and/or
customers, increased customer preference for mail-order or discount store
purchases of clones of major vendor products, and reduction in the benefits
realizable by the Company from vendor marketing incentive programs.
NUMBER OF EMPLOYEES
At December 30, 1995, the number of employees was 2,196. None of the
employees are covered by a collective bargaining agreement. The Company
considers its relations with employees to be good.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS AND EXPORT SALES
The Company has no foreign locations or material export sales. The Company
has access to international logistics and configuration services through
affiliations with the International Computer Group (Europe and Asia); GE
Hamilton Technology Services, Inc. (Canada) and InaCom Latin America (Mexico,
the Caribbean, Central and South America).
ITEM 2. PROPERTIES
The Company's principal executive and administrative operations are located
in approximately 63,000 square feet of commercial office space in Omaha,
Nebraska, which is under a lease expiring in July 1998. The lease contains a
renewal option.
The Company leases a distribution and configuration facility in Omaha,
Nebraska, with approximately 128,000 square feet under a lease expiring in May
2003; a distribution and configuration facility in Swedesboro, New Jersey, with
approximately 121,700 square feet expiring in October 2002 and a distribution
and configuration facility in Fontana, California, with approximately 71,800
square feet expiring in July 1996. Upon expiration of the lease on the Fontana,
California facility, the Company will lease a 178,000 square foot distribution
and configuration facility in Ontario, California for a term expiring in April
2006. These facilities serve as the distribution and configuration points for
the Company.
The land and buildings for all other Company-owned business centers and
warehouse facilities are leased. Most of these leases are operating leases,
under which the Company pays maintenance, insurance, repairs and utility costs.
Average terms of these leases are one to five years with options to renew or
terminate.
ITEM 3. PENDING LEGAL PROCEEDINGS
The Company is involved in a limited number of legal actions arising in the
ordinary course of business, none of which is expected to have a material
adverse effect on the consolidated financial statements of the Company.
6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 1, 1996 are listed below,
together with their ages and all Company positions and offices held by them.
NAME AGE POSITION
- ------------------------ --- -----------------------------------------------------
Bill L. Fairfield 49 President and Chief Executive Officer
Robert A. Schultz 53 President and General Manager of Direct Operations
and Client Service Division
George DeSola 49 Group President of Communications and Corporate
Marketing
Michael A. Steffan 44 President and General Manager, Distribution and
Operations, and Secretary
David C. Guenthner 46 Executive Vice President and Chief Financial Officer
Larry Fazzini 48 Vice President of Corporate Resources
Cris Freiwald 41 President and General Manager, International Division
Steven Ross 38 President and General Manager, Reseller Division
Gary Goldsberry 47 Vice President and Corporate Treasurer
Except as set forth below, all of the officers have been associated with the
Company in their present position or other capacities for more than the past
five years.
BILL L. FAIRFIELD has been President, Chief Operating Officer and a Director
of the Company since March 1985. He was named Chief Executive Officer in
September 1987.
ROBERT A. SCHULTZ was named President and General Manager of Direct
Operations in April 1994 in addition to his position as President and General
Manager of Client Service Division which he has held since January 1993. Mr.
Schultz was responsible for Direct Operations and the Advanced Systems and
Services Group for the Company from August 1991 to January 1993.
GEORGE DESOLA was named Group President of Communications and Corporate
Marketing in December 1994. Prior to December 1994, Mr. DeSola was President and
General Manager of Communications, a position he has held since he joined the
Company in March 1994. Prior to March 1994, Mr. DeSola was the Vice President of
Marketing and Customer Service for MCI Communications Corp, a telecommunications
company.
MICHAEL A. STEFFAN was named President and General Manager of the
Distribution and Operations in December 1995. Mr. Steffan was responsible for
the Reseller Division from December 1994 to December 1995 in addition to his
position as President and General Manager of Distribution and Operations, a
position he had held since May 1993. Prior to May 1993, Mr. Steffan was Vice
President of Corporate Development and Secretary for the Company.
DAVID C. GUENTHNER was named Executive Vice President and Chief Financial
Officer in November 1991. Prior to November 1991, Mr. Guenthner was Senior Vice
President of Finance and Chief Financial Officer for the Company.
LARRY FAZZINI was named Vice President of Corporate Resources in February
1993 when he joined the Company. Prior to February 1993, Mr. Fazzini was the
Director of Human Resources for Sears Business Centers, Inc., a distributor of
information technology products and services.
7
STEVEN ROSS joined the Company in December 1995 as President and General
Manager of the Reseller Division. Mr. Ross was Vice President of Sales and
Business Development at Intelligent Electronics Inc., a distributor of
information technology products, from September 1993 to November 1995. Prior to
September 1993, Mr. Ross was the Executive Vice President of Ultimate/Allerion
Corp., an international systems integrator company.
CRIS FREIWALD was named President and General Manager of the International
Division in November 1994. Mr. Freiwald was Vice President of Corporate
Development from May 1993 to November 1994. Prior to May 1993, Mr. Freiwald was
Director of Business Development.
GARY GOLDSBERRY was named Vice President in May 1993. Mr. Goldsberry has
been Corporate Treasurer since December 1990.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
This information is included with the information set forth under Item 8
below.
ITEM 6. SELECTED FINANCIAL DATA
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- -------------- -------------- ------------
Income statement data:
Revenue.................................... $ 2,200,344 $ 1,800,539 $ 1,545,227 $ 1,014,466 $ 680,421
Earnings (loss) before income taxes........ 19,833 (3,749) 19,693 17,959 5,700
Net earnings (loss)........................ 11,707 (2,256) 11,975 10,734 3,404
Earnings (loss) per share.................. 1.14 (0.22) 1.26 1.25 0.56
Cash dividends per share................... $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Working capital............................ $ 90,940 $ 78,759 $ 67,936 $ 65,901 $ 76,968
Total assets............................... 624,238 519,875 456,894 288,365 307,802
Long-term debt............................. 23,667 30,333 20,000 36,800 59,242
Stockholders' equity....................... $ 148,775 $ 135,590 $ 136,491 $ 101,275 $ 89,533
Statistical information:
Revenue change versus prior year........... 22.2% 16.5% 52.3% 49.1% 59.0%
Earnings change versus prior year.......... 618.9% (118.8)% 11.6 % 215.3 % (51.1) %
Earnings (loss) as a percent of beginning
equity.................................... 8.6 % (1.7) % 11.8 % 12.0 % 8.7 %
Selling, general and administrative
expenses as a percent of gross margin..... 83.1 % 95.1 % 83.3 % 78.3 % 87.5 %
Revenue per dollar of assets employed...... $ 3.52 $ 3.46 $ 3.38 $ 3.52 $ 2.21
Current ratio.............................. 1.20:1 1.22:1 1.23:1 1.45:1 1.51:1
Long-term debt as a percent of long-term
debt and equity........................... 13.7 % 18.3 % 12.8 % 26.7 % 39.8 %
Other Information:
Book value per share....................... $ 14.85 $ 13.75 $ 13.92 $ 12.24 $ 11.07
Common stock market prices:
High..................................... $ 15.25 $ 21.00 $ 25.50 $ 14.75 $ 18.50
Low...................................... $ 7.00 $ 6.87 $ 12.75 $ 9.25 $ 7.00
Approximate number of shareholders......... 4,300 4,150 3,800 640 690
Weighted average shares outstanding........ 10,300 10,300 9,500 8,566 6,119
Number of employees at end of year......... 2,196 1,884 1,883 1,309 1,380
Revenue dollars per employee based on end
of year employment........................ $ 1,002 $ 956 $ 821 $ 775 $ 493
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the indicated periods, certain data as
percentages of total revenue, together with the percentage change in the line
items for the periods indicated.
PERCENTAGE
INCREASE (DECREASE)
PERCENTAGE OF REVENUE ------------------------
YEARS ENDED DECEMBER 1995 1994
------------------------------------- VS VS
1995 1994 1993 1994 1993
----------- ----------- ----------- ----------- -----------
Revenue....................................... 100.0% 100.0% 100.0% 22.2% 16.5%
Direct costs.................................. 90.7 90.6 89.0 22.4 18.6
----- ----- ----- ----- -----------
Gross margin.................................. 9.3 9.4 11.0 20.8 (0.4)
Selling, general and administrative expense... 7.7 8.9 9.1 5.6 13.7
----- ----- ----- ----- -----------
Operating income.............................. 1.6 0.5 1.9 316.2 (70.7)
Interest expense, net......................... 0.7 0.7 0.6 21.6 40.0
----- ----- ----- ----- -----------
Earnings (loss) before income tax............. 0.9 (0.2) 1.3 629.0 (119.0)
Income tax expense (benefit).................. 0.4 (0.1) 0.5 644.3 (118.8)
----- ----- ----- ----- -----------
Net earnings (loss)........................... 0.5% (0.1)% 0.8% 618.9% (118.8)%
----- ----- ----- ----- -----------
----- ----- ----- ----- -----------
1995 COMPARED TO 1994
Customer expectations of computer resellers have evolved from requests for
delivery of computer products in a cost effective manner to requests for
providing services beyond the sale of products. The Company has therefore
increased its focus on providing services to customers throughout the entire
life cycle of the products it sells.
The Company generates revenue, gross margin and earnings throughout the life
cycle of the products. These revenues, gross margin and earnings are comprised
of three main classifications; (i) computer product sales, (ii) technology
management services and (iii) communication products and services. Computer
product sales are derived from the sale of microcomputer systems, workstations
and related products through the Company's independent reseller channel,
Company-owned business centers and other distribution facilities. Technology
management services are derived from the sale of technology procurement
services, systems integration services and systems support services through the
Company's independent reseller channel, Company-owned business centers and other
distribution facilities. Communication products and services are derived from
the sale of voice and data equipment, long distance services and convergence
technology through the Company's communications division.
The discussion that follows provides information on the business in terms of
services provided throughout the life cycle of the products sold by the Company
(results by classification) and an analysis in terms of operations as
historically reported (results by channel).
10
REVENUES BY CLASSIFICATION
The following table sets forth, for the indicated periods, revenue by
classification and mix of revenue.
INCREASE
------------------------
TOTAL REVENUES (IN THOUSANDS) 1995 1994 DOLLARS PERCENT
- --------------------------------------------------- ------------- ------------- ----------- -----------
Computer products.................................. $ 2,047,215 $ 1,680,397 $ 366,818 21.8%
Technology management services..................... 95,476 85,406 10,070 11.8%
Communication products and services................ 57,653 34,736 22,917 66.0%
------------- ------------- ----------- ---
Total.......................................... $ 2,200,344 $ 1,800,539 $ 399,805 22.2%
------------- ------------- ----------- ---
------------- ------------- ----------- ---
1995 1994
----------- -----------
Revenue:
Computer products............................................................ 93.0% 93.3%
Technology management services............................................... 4.3 4.7
Communication products and services.......................................... 2.7 2.0
----- -----
Total revenue.............................................................. 100.0% 100.0%
----- -----
----- -----
Computer product sales increased $366.8 million or 21.8% to $2.0 billion
during 1995. Computer services increased $10.1 million or 11.8% to $95.5 million
during 1995. Communications products and services revenue increased $22.9
million or 66% to $57.7 million during 1995.
Revenues from computer product sales increased as a result of broad based
growth within both the independent reseller channel and the Company-owned
business centers. Technology management services revenue increased as a result
of the increase in computer product sales. Revenues from communication products
and services increased as a result of broad based growth within the Company's
communications division.
REVENUES BY CHANNEL
The following table sets forth, for the indicated periods, revenue by
channel and the mix of revenue.
INCREASE
------------------------
TOTAL REVENUES (IN THOUSANDS) 1995 1994 DOLLARS PERCENT
- --------------------------------------------------- ------------- ------------- ----------- -----------
Independent reseller channel and distribution
facilities........................................ $ 1,106,571 $ 920,409 $ 186,162 20.2%
Company-owned business centers..................... 994,134 807,592 186,542 23.1%
Other.............................................. 99,639 72,538 27,101 37.4%
------------- ------------- ----------- ---
Total.......................................... $ 2,200,344 $ 1,800,539 $ 399,805 22.2%
------------- ------------- ----------- ---
------------- ------------- ----------- ---
1995 1994
----------- -----------
Revenue:
Independent reseller channel and distribution facilities..................... 50.3% 51.1%
Company-owned business centers............................................... 45.2 44.9
Other........................................................................ 4.5 4.0
----- -----
Total revenue.............................................................. 100.0% 100.0%
----- -----
----- -----
Revenues for 1995 increased $399.8 million or 22.2% to $2.2 billion when
comparing the fiscal year ended December 30, 1995 with the fiscal year ended
December 31, 1994. Revenue generated from the independent reseller channel
(which includes franchises, system integrators and other value added resellers)
was approximately $1.1 billion, or 50.3% of 1995 total revenue, compared to
$920.4 million or 51.1% of total revenue in 1994. Company-owned business centers
generated $994.1 million
11
or 45.2% of total revenue for 1995, compared to $807.6 million or 44.9% of total
revenue in 1994. Revenue from other sources was $99.6 million or 4.5% of total
revenue in 1995, compared to $72.5 million or 4.0% of total revenue in 1994.
Revenues from the independent reseller channel increased as a result of
growth within the Company's existing reseller channel, an increase in products
shipped directly to the end-user customer on instruction from the reseller and
an increase in second source revenue. Second source revenue is generated from
sales to independent resellers who are not Inacom resellers by contract. These
revenues are primarily a result of open sourcing which resulted from certain
manufacturers, beginning in 1994, lessening or eliminating requirements from
independent resellers to purchase product from one source. Revenues from the
Company-owned business centers increased as a result of broad based growth
across all regional locations. Revenue from other sources increased primarily as
a result of the growth in voice and data equipment sales as well as growth in
product liquidation sales.
GROSS MARGINS BY CLASSIFICATION
The following table sets forth, for the indicated periods, gross margin and
gross margin percentages by classification.
AS % OF TOTAL
PERCENT ------------------------
TOTAL GROSS MARGIN (IN THOUSANDS) 1995 1994 (1) INCREASE 1995 1994
- ------------------------------------------------- ----------- ----------- ------------ ----------- -----------
Computer products................................ $ 122,386 $ 113,797 7.5% 60.1% 65.5%
Technology management services................... 67,599 52,506 28.7% 33.2% 30.2%
Communication products and services.............. 13,821 7,516 83.9% 6.7% 4.3%
----------- ----------- --- ----- -----
Total........................................ $ 203,806 $ 173,819 17.3% 100.0% 100.0%
----------- ----------- --- ----- -----
----------- ----------- --- ----- -----
1995 1994 (1)
----------- ------------
Computer products................................................................ 6.0% 6.8%
Technology management services................................................... 70.8% 61.5%
Communication products and services.............................................. 24.0% 21.6%
--- ---
Company gross margin percentage.............................................. 9.3% 9.7%
--- ---
--- ---
- ------------------------
(1) The amounts for 1994 exclude the impact of the non-recurring charges
recognized in the second quarter of 1994. See 1994 compared to 1993 --
Nonrecurring Charges below.
Computer product margins increased $8.3 million or 7.5% to $122.4 million
during 1995 and the gross margin percentage, exclusive of non-recurring charges
recognized in the second quarter of 1994, decreased 0.8 percentage points to
6.0% in 1995. Technology management services margin increased $15.1 million or
28.7% to $67.6 million during 1995 and the gross margin percentage, exclusive of
non-recurring charges recognized in the second quarter of 1994, increased 9.3
percentage points to 70.8% in 1995. Communications product and services margin
increased $6.3 million or 83.9% to $13.8 million during 1995 and the gross
margin percentage increased 2.4 percentage points to 24.0% in 1995. Computer
products margin was 60.1% of total 1995 gross margin versus 65.5% of total 1994
gross margin. Technology management services gross margin was 33.2% of total
1995 gross margin versus 30.2% of total 1994 gross margin. Communications
products and services gross margin was 6.7% of total 1995 gross margin versus
4.3% of total 1994 gross margin.
The increase in gross margin dollars for computer products was a result of
the increase in revenues. The decline in gross margin percentage for computer
products was a result of market pricing pressures related to open sourcing,
which began in the independent reseller channel during the second quarter of
1994, and an overall decline in hardware margins realized on end user sales. The
increase in gross margin dollars and gross margin percentage for technology
management services resulted from the increased revenues and an increase in mix
of services revenues to include more higher margin systems integration services
versus the support and technology procurement services.
12
The increase in gross margin dollars and gross margin percentage for the
communication products and services was a result of the increased revenues and
the increase in the mix of revenues to include more higher margin long distance
and services.
GROSS MARGINS BY CHANNEL
The following table sets forth, for the indicated periods, gross margin and
gross margin percentage by channel.
PERCENT AS % OF TOTAL
INCREASE ------------------------
TOTAL GROSS MARGIN (IN THOUSANDS) 1995 1994 (1) (DECREASE) 1995 1994
- ----------------------------------------------- ----------- ----------- ------------- ----------- -----------
Independent reseller channel and distribution
facilities.................................... $ 35,889 $ 38,964 (7.9)% 17.6% 22.4%
Company-owned business centers................. 143,069 116,797 22.5% 70.2% 67.2%
Other.......................................... 24,848 18,058 37.6% 12.2% 10.4%
----------- ----------- --- ----- -----
Total...................................... $ 203,806 $ 173,819 17.3% 100.0% 100.0%
----------- ----------- --- ----- -----
----------- ----------- --- ----- -----
1995 1994 (1)
----------- ------------
Independent reseller channel and distribution facilities.......................... 3.2% 4.2%
Company-owned business centers.................................................... 14.4% 14.5%
Other............................................................................. 24.9% 24.9%
--- ---
Company gross margin percentage............................................... 9.3% 9.7%
--- ---
--- ---
- ------------------------
(1) Excludes the impact of non-recurring charges recognized in the second
quarter of 1994.
Including the effect of the 1994 non-recurring charges, gross margin dollars
increased $35.1 million or 20.8% to $203.8 million during 1995. Gross margin
dollars from the independent reseller channel decreased $775 thousand or 2.1%
during 1995. Gross margin dollars from Company-owned business centers increased
$29.1 million or 25.5% during 1995. Gross margin dollars from other sources
increased $6.8 million or 37.6% during 1995.
Including the effect of the 1994 non-recurring charges, gross margin for the
Company as a percentage of sales was 9.3% for the year ended December 30, 1995
compared to 9.4% for the year ended December 31, 1994. The gross margin
percentage from the independent reseller channel was approximately 3.2% in 1995
compared to 4.0% in 1994. The gross margin percentage for Company-owned business
centers was 14.4% in 1995 and 14.1% in 1994. The gross margin percentage from
other sources was 24.9% in both 1995 and 1994.
Excluding the impact of the non-recurring charges recognized in the second
quarter of 1994, gross margin dollars increased $30.0 million or 17.3% during
1995 and the gross margin percentage decreased 0.4 percentage points during
1995. Excluding the 1994 non-recurring charges, the gross margin dollars for the
independent reseller channel decreased $3.1 million or 7.9% during 1995 and the
gross margin percentage decreased 1.0 percentage point during 1995. Excluding
the 1994 non-recurring charges, the gross margin dollars for the Company-owned
business centers increased $26.3 million or 22.5% during 1995 and the gross
margin percentage decreased 0.1 percentage point during 1995.
The decrease in gross margin dollars for the independent reseller channel
resulted from the decrease in gross margin percentage. The decrease in gross
margin percentage was a result of market pricing pressures. These market pricing
pressures were primarily attributable to open sourcing which began in the second
quarter of 1994.
The increase in gross margin dollars from the Company-owned business centers
resulted from the increased revenues during 1995. The decrease in gross margin
percentages resulted from the mix of revenues. While hardware margin percentages
decreased during 1995, the increase in the mix of
13
revenues to include more training, technical and support services offset the
negative impact of declining hardware margins. The increase in gross margin
dollars from other sources was primarily due to the increased revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $8.9 million
or 5.6% to $169.3 million in 1995. As a percentage of gross margin, these
expenses decreased 12.0 percentage points from to 95.1% in 1994 to 83.1% in
1995. Excluding the impact of 1994 non-recurring charges, SG&A expenses
increased $10.9 million or 6.9% during 1995. SG&A as a percent of gross margin,
excluding the impact of non-recurring charges recognized in the second quarter
of 1994, decreased 8.1 percentage points during 1995.
The increase in SG&A during 1995 resulted primarily from increased spending
partially offset by an increase in market development funds earned from various
vendors and credited against SG&A. The increase in spending was primarily a
result of employee increases and contract labor expenses to support the
increasing service revenue component of the Company-owned business centers. The
increase in vendor funds earned resulted from attainment of program objectives
outlined by vendors primarily driven by higher revenues in 1995. The decrease in
SG&A as a percent of margin during 1995 resulted from operational efficiencies
achieved through investments in distribution center automation and information
systems.
INTEREST EXPENSE
Net interest expense for 1995 increased by $2.6 million to $14.6 million.
The increase was due primarily to the increase in borrowing rates. The Company's
short-term borrowing rates for 1995 increased approximately 1.3 percentage
points during the year while the average daily borrowings decreased to $178.8
million in 1995 from $201.9 million in 1994.
PRE-TAX EARNINGS
AS % OF TOTAL
PERCENT ------------------------
TOTAL PRE-TAX EARNINGS (IN THOUSANDS) 1995 1994 (1) INCREASE 1995 1994
- ------------------------------------------------- --------- --------- ----------- ----------- -----------
Computer products................................ $ 9,179 $ (1,141) 904.5% 46.3% (33.9)%
Technology management services................... 8,932 4,378 104.0% 45.0% 129.9%
Communication products and services.............. 1,722 134 1,185.1% 8.7% 4.0%
--------- --------- ----------- ----- -----
Total........................................ $ 19,833 $ 3,371 488.3% 100.0% 100.0%
--------- --------- ----------- ----- -----
--------- --------- ----------- ----- -----
- ------------------------
(1) Excludes the impact of non-recurring charges recognized in the second
quarter of 1994.
The effective income tax rate was approximately 41% in 1995 and 40% in 1994.
NET EARNINGS
For the reasons described above, the net earnings for 1995 were $11.7
million compared to a net loss of $2.3 million in 1994 which includes 1994
non-recurring charges of $4.2 million; an increase of $14.0 million. Earnings
per share for 1995 were $1.14 compared to a loss per share of $0.22 in 1994
which includes 1994 non-recurring charges of $.41 per share.
14
1994 COMPARED TO 1993
NON-RECURRING CHARGES
During the second quarter of 1994 the Company reported a loss due in part to
non-recurring charges relating to (i) a Department of Defense contract, (ii)
settlement of certain warranty claims, (iii) a receivable from a supplier that
filed bankruptcy and (iv) severance costs for corporate staff reductions.
The Company incurred a second quarter non-recurring charge of $3.5 million
relating to a contract with the Department of Defense. The contract, which was
assumed by the Company in the Sears Business Center (SBC) acquisition in 1993,
expired in December 1994. While the contract was marginally profitable in the
fourth quarter of 1993 and first quarter of 1994, the Defense Department began
ordering lower-margin product for the remainder of the contract. The Company was
unable to deliver profitably the product specified by the government under the
terms of the contract and therefore accrued in the second quarter losses
expected to be realized through the remainder of the year. The non-recurring
charge for anticipated future losses at the end of the second quarter increased
cost of sales by approximately $2.2 million and selling, general and
administrative (SG&A) expenses by approximately $1.3 million. In addition to the
charge taken at the end of the quarter, the second quarter operations impact of
the contract reflected in cost of sales an additional charge of approximately
$600,000 and SG&A reflected an additional charge of approximately $400,000.
The warranty claims resulted from a contract relating to specialized
software applications and involved claims against the Company and the hardware
suppliers. The Company agreed to settle for $1.0 million payable over two years.
The non-recurring charge increased cost of sales by approximately $700,000 at
the end of the second quarter and increased the reserves to the level required
for the settlement. In addition to the charge taken at the end of the quarter,
cost of sales reflected an additional charge of approximately $300,000 during
the second quarter to increase the reserve position to the amount required to
cover the potential loss.
The Company had a receivable and an inventory return judgment against a
California-based supplier of hardware that filed bankruptcy in the second
quarter. As a result, payment of the judgment amount outstanding appeared
doubtful and the Company increased its reserve position to $1.3 million to cover
the potential loss. The non-recurring charge at the end of the second quarter
increased cost of sales by approximately $500,000. In addition to the charge
taken at the end of the quarter, cost of sales reflected an additional charge of
approximately $800,000 during the second quarter to increase the reserve
position to the amount required to cover the potential loss.
The Company also instituted staff reductions in the second quarter and
accrued $320,000 relating to severance costs for the reductions.
REVENUES
Revenues for 1994 increased $255.3 million or 16.5% to $1.8 billion when
comparing the fiscal year ended December 31, 1994 with the fiscal year ended
December 25, 1993. Revenue generated from the independent reseller channel was
approximately $920.4 million, or 51.1% of 1994 total revenue, compared to $742.4
million or 48.0% of total revenue in 1993. Company-owned business centers
generated $807.6 million or 44.9% of total revenue for 1994, compared to $750.8
million or 48.6% of total revenue in 1993. Revenue from other sources was $72.5
million or 4.0% of total revenue in 1994, compared to $52.0 million or 3.4% of
total revenue in 1993.
Revenue from the independent reseller channel increased as a result of
industry growth and an increase in products shipped to the end-user customer
rather than the reseller location under the Company's Direct Express Program.
The revenue growth from the Company-owned business centers was primarily in the
last six months of the year due to an increase in large corporate sales and
educational institution sales in the Northeast (New York, New Jersey and
Pennsylvania); revenue in the first six months of the year was lower than
expected in the West (California) and Northeast due to the departure of sales
representatives, an earthquake in California and severe winter weather in the
15
Northeast. Revenue from other sources increased as a result of growth in both
voice and data equipment sales and from services such as extended warranty
contracts, consulting and network design.
GROSS MARGIN
Gross margin dollars decreased $0.7 million or 0.4% to $168.7 million during
1994. Gross margin dollars from the independent reseller channel decreased $12.0
million or 24.7% during 1994. Gross margin dollars from Company-owned business
centers increased $7.3 million or 6.8% during 1994. Gross margin dollars from
other sources increased $4.0 million or 28.7% during 1994. The decrease in gross
margin dollars from the independent reseller channel is primarily due to market
pricing pressures, open sourcing, freight costs incurred that were in excess of
freight collected from customers, and non-recurring charges that occurred in the
second quarter (described above). Freight costs incurred in excess of freight
charged to customers resulted primarily from shipments through the Company's
Direct Express program. The increase in Direct Express shipments resulted in
higher freight costs as the average value per shipment to customers decreased
causing a difference between freight paid to carriers and freight billed to
customers. Beginning in August the Company changed its freight program to bill
actual freight cost on all shipments under Direct Express, which significantly
reduced the negative impact of freight charges on gross margins in the second
half of the year.
The increase in gross margin dollars from the Company-owned business centers
occurred in the last six months of the year as a result of the increased revenue
and the result of the mix of revenues to include more higher margin products,
and the sale of more technical and support services. Gross margins were
negatively impacted by the non-recurring charges (described above) in the second
quarter relating to the Department of Defense contract. The increase in gross
margin dollars from other sources was primarily due to the increased revenue.
Gross margin for the Company as a percentage of sales was 9.4% for the year
ended December 31, 1994 compared to 11.0% for the year ended December 25, 1993.
The gross margin percentage from the independent reseller channel was
approximately 4.0% in 1994 compared to 6.6% in 1993. The gross margin percentage
for Company-owned business centers was 14.1% in 1994 and 14.2% in 1993. The
gross margin percentage from other sources was 24.9% in 1994 compared to 27.0%
in 1993. The decrease in gross margin percentage from the independent reseller
channel was primarily due to market pricing pressures resulting from open
sourcing, non-recurring charges incurred in the second quarter (described
above), and freight costs. The decrease in gross margin percentages for company-
owned business centers in 1994 resulted from the non-recurring charges. The
decrease in gross margin percentage from other sources was attributable to the
mix of revenue between voice and data equipment, repair and maintenance
contracts and extended warranty contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $19.3 million
or 13.7% to $160.4 million in 1994. As a percentage of gross margin, these
expenses increased to 95.1% in 1994 from 83.3% in 1993. The increase in SG&A
dollars and SG&A to gross margin dollars was primarily due to increased
advertising and promotional spending by the Company in both the independent
reseller channel and the Company-owned business centers, reduced vendor
marketing reimbursements to offset such promotional costs, and increased
spending in relation to operating the service division of the Company as a
result of the SBC acquisition. The Company-owned business centers' SG&A expenses
also increased over 1993 due to higher revenues and gross margins as well as
realizing a full year's expense of operating the SBC locations which were
purchased in March 1993.
Operating income decreased $20 million or 70.7% to $8.3 million in 1994 when
compared to 1993. The decrease resulted primarily from the reduction in gross
margin dollars and the increase in SG&A expenses as discussed above.
16
INTEREST EXPENSE
Net interest expense for 1994 increased by $3.4 million to $12 million. The
increase was due primarily to the increase in average daily borrowings and an
increase in the borrowing rates. Average daily borrowings for the year ended
December 31, 1994 were $201.9 million compared to $148.3 million for the year
ended December 25, 1993. The increase in borrowings resulted from higher working
capital needs as a result of carrying high levels of inventory and also higher
levels of accounts receivable due to increased revenues, and taking advantage of
early pay discounts from the manufacturers. The Company's short-term borrowing
rates for 1994 increased approximately two percentage points during the year.
The effective income tax rate was approximately 40% in 1994 and 1993.
NET EARNINGS (LOSS)
For the reasons described above, the net loss for 1994 was $2.3 million,
which includes non-recurring charges of $4.2 million, compared to net earnings
of $12.0 million in 1993; a decrease of $14.3 million. Loss per share for 1994
was $.22, which includes non-recurring charges of $.41 per share, compared to
earnings per share of $1.26 in 1993.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary sources of liquidity are provided through a working
capital financing agreement for $350.0 million and $30.3 million in two private
placement notes.
The Company entered into a working capital financing agreement in June 1995
with a financial services organization and terminated previous revolving credit
facilities. The $350.0 million working capital financing agreement expires June
29, 1998. At December 30, 1995, $76.9 million was outstanding under the working
capital line and the interest rate was 7.68% based on LIBOR. The working capital
financing agreement is secured by accounts receivable and inventory.
The two private placement notes are held by unaffiliated insurance
companies. The principal amount of the first note, $13.3 million, is payable in
two annual installments of $6.7 million commencing on May 31, 1996 and bears
interest at 10.31% payable quarterly. The principal amount of the second note,
$17 million, is payable in five annual installments of $3.4 million commencing
on February 28, 1997 and bears interest at 6.83% payable quarterly. The notes
are secured by accounts receivable and inventory.
The working capital and debt agreements contain certain restrictive
covenants, including the maintenance of minimum levels of working capital,
tangible net worth, fixed charge coverage, limitations on incurring additional
indebtedness and restrictions on the amount of net loss that the Company can
incur. The Company was in compliance with the covenants contained in the
agreements at December 30, 1995.
Long-term debt was 13.7% of total long-term debt and equity at December 30,
1995 versus 18.3% at December 31, 1994. The decrease was primarily a result of
the reduction in long term debt due to the scheduled payment of $6.7 million on
one of the private placement notes.
The Company entered into an agreement in June 1995 (which agreement was
amended and restated in August 1995) to sell $100 million of accounts
receivable, with limited recourse, to an unrelated financial institution. New
qualifying receivables are sold to the financial institution as collections
reduce previously sold receivables in order to maintain a balance of $100
million sold receivables. On December 30, 1995, $21.4 million of additional
accounts receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company receivables
have been substantially less than such additional amount. At December 30, 1995,
the implicit interest rate on the receivables sale transaction was 6.31%.
Operating activities used cash of $57.7 million in 1995 compared to cash
provided by operating activities of $80.4 million in 1994. The primary factor
contributing to the change in cash used by
17
operating activities was a $75.3 million increase in accounts receivable and a
$124.3 million increase in inventory, with a portion of these increases financed
through a $105.1 million increase in accounts payable. Accounts receivable
levels increased due to the increased revenues. The increase in inventory levels
was primarily a result of the Company's focus on increasing the availability of
products to its customers and the related increase in accounts payable was
primarily a result of the Company's efforts to match accounts payable terms
better with inventory turns.
The Company used $10.3 million in cash to purchase fixtures and equipment
and advanced, net of collections, $1.9 million of notes receivable through
investing activities in 1995.
Net cash provided by financing for 1995 totaled $81.2 million, of which $100
million was provided from the sale of accounts receivable. The expended proceeds
were used, in part, to reduce long term and short term borrowings by $6.7
million and $13.2 million, respectively.
The Company believes the funding expected to be generated from operations
and provided by the revolving credit facility will be sufficient to meet working
capital and capital investment needs in 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company listed in the index
appearing under Item 14(a)(1) and (2) hereof are filed as part of this Annual
Report on Form 10-K and are incorporated by reference in this Item 8. See also
"Index to Financial Statements" on page 21 hereof. Certain quarterly financial
data is set forth below.
Dollars in thousands except per share amounts.
STOCK
NET MARKET PRICE
GROSS EARNINGS NET PER --------------------
REVENUES MARGIN (LOSS) SHARE SHARES HIGH LOW
------------- ----------- ------------- ------------- --------- --------- ---------
1995
First......... $ 483,956 $ 45,916 $ 2,114 $ 0.21 10,300 $ 9.38 $ 7.00
Second........ 526,909 48,388 2,575 0.25 10,300 14.25 8.25
Third......... 533,254 50,819 2,577 0.25 10,300 15.25 12.25
Fourth........ 656,225 58,683 4,441 0.43 10,300 15.12 9.50
------------- ----------- ------------- ------ --------- --------- ---------
Year.......... $ 2,200,344 $ 203,806 $ 11,707 $ 1.14 10,300 $ 15.25 $ 7.00
------------- ----------- ------------- ------ --------- --------- ---------
------------- ----------- ------------- ------ --------- --------- ---------
1994
First......... $ 399,294 $ 44,623 $ 2,630 $ 0.26 10,300 $ 21.00 $ 13.50
Second........ 408,643 32,778 (7,898)(1) (0.77)(1) 10,300 16.50 7.50
Third......... 459,170 41,780 514 0.05 10,300 10.25 7.25
Fourth........ 533,432 49,538 2,498 0.24 10,300 10.37 6.87
------------- ----------- ------------- ------ --------- --------- ---------
Year.......... $ 1,800,539 $ 168,719 $ (2,256)(1) $ (0.22)(1) 10,300 $ 21.00 $ 6.87
------------- ----------- ------------- ------ --------- --------- ---------
------------- ----------- ------------- ------ --------- --------- ---------
- ------------------------
(1) Includes a charge of $4.2 million or $0.41 per share resulting from
non-recurring items.
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotations
("NASDAQ") National Market System under the symbol INAC. As of March 1, 1996,
the Company estimates there were 4,300 beneficial holders of the Company's
Common Stock.
The Company has never declared or paid a cash dividend to stockholders. The
Board of Directors presently intends to retain all earnings to finance the
expansion of the Company's operations and does not expect to authorize cash
dividends in the foreseeable future. Any payment of cash dividends in the future
will depend upon the Company's earnings, capital requirements and other factors.
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except for the information relating to the executive officers of the Company
set forth in Part I of this Report, the information called for by items 10, 11,
12 and 13 is incorporated herein by reference to the following sections of the
Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
April 18, 1996: Certain Stockholders; Election of Directors; Directors Meetings
and Compensation; Summary Compensation Table; Option Grants in Fiscal Year 1995;
Option Exercises in Fiscal 1995 and Fiscal Year-End Values; and Employment,
Consulting and Other Agreements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) (2) FINANCIAL STATEMENTS. See index to consolidated financial
statements and supporting schedules.
(a) (3) EXHIBITS. See exhibit index, which index is incorporated herein by
reference.
(b) The Company did not file a report on Form 8-K during the last quarter of
the period covered by this report.
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
InaCom Corp.:
We have audited the accompanying consolidated financial statements of InaCom
Corp. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InaCom Corp.
and subsidiaries at December 30, 1995 and December 31, 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 30, 1995, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 4 to the consolidated financial statements, the Company
adopted the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, IN 1993.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Omaha, Nebraska
February 16, 1996
20
INACOM CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE(S)
---------
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations -- Three-Year Period Ended
December 30, 1995..................................................................................... 22
Consolidated Balance Sheets -- December 30, 1995 and December 31, 1994................................. 23
Consolidated Statements of Stockholders' Equity -- Three-Year Period Ended December 30, 1995........... 24
Consolidated Statements of Cash Flows -- Three-Year Period Ended
December 30, 1995..................................................................................... 25
Notes to Consolidated Financial Statements -- Three-Year Period Ended December 30, 1995................ 26 - 32
FINANCIAL STATEMENT SCHEDULE SUPPORTING CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II -- Valuation and Qualifying Accounts....................................................... 33
All other schedules have been omitted as the required information is
inapplicable or the information is included in the consolidated financial
statements or related notes.
21
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995 1994 1993
------------- ------------- -------------
Revenues:
Independent reseller channel and distribution facilities........... $ 1,106,571 $ 920,409 $ 742,406
Company-owned business centers..................................... 994,134 807,592 750,803
Other.............................................................. 99,639 72,538 52,018
------------- ------------- -------------
2,200,344 1,800,539 1,545,227
------------- ------------- -------------
Direct costs:
Independent reseller channel and distribution facilities........... 1,070,682 883,745 693,723
Company-owned business centers..................................... 851,065 693,595 644,083
Other.............................................................. 74,791 54,480 37,990
------------- ------------- -------------
1,996,538 1,631,820 1,375,796
------------- ------------- -------------
Gross margin..................................................... 203,806 168,719 169,431
Selling, general and administrative expenses......................... 169,338 160,437 141,142
------------- ------------- -------------
Operating income................................................. 34,468 8,282 28,289
Interest expense..................................................... 14,635 12,031 8,596
------------- ------------- -------------
Earnings (loss) before income taxes and cumulative effect of
change in accounting for income taxes........................... 19,833 (3,749) 19,693
Income tax expense (benefit)......................................... 8,126 (1,493) 7,947
------------- ------------- -------------
Earnings (loss) before cumulative effect of change in accounting
for income taxes................................................ 11,707 (2,256) 11,746
Cumulative effect of change in accounting for income taxes........... -- -- 229
------------- ------------- -------------
Net earnings (loss).............................................. $ 11,707 $ (2,256) $ 11,975
------------- ------------- -------------
------------- ------------- -------------
Earnings (loss) per share............................................ $1.14 $(.22) $1.26
Weighted average shares outstanding.................................. 10,300 10,300 9,500
------------- ------------- -------------
------------- ------------- -------------
See accompanying notes to consolidated financial statements.
22
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1995 1994
----------- -----------
Current assets:
Cash and cash equivalents.......................................................... $ 20,690 $ 10,514
Accounts receivable, less allowance for doubtful accounts of $3,537 in 1995 and
$2,626 in 1994.................................................................... 160,306 184,973
Deferred income taxes.............................................................. 4,202 4,913
Inventories........................................................................ 352,948 228,652
Other current assets............................................................... 1,794 1,184
----------- -----------
Total current assets........................................................... 539,940 430,236
----------- -----------
Property and equipment, at cost...................................................... 85,922 75,778
Less accumulated depreciation...................................................... 44,421 30,922
----------- -----------
Net property and equipment..................................................... 41,501 44,856
----------- -----------
Other assets, net of accumulated amortization........................................ 17,831 18,702
Cost in excess of net assets of business acquired, net of accumulated amortization... 24,966 26,081
----------- -----------
$ 624,238 $ 519,875
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................... $ 331,221 $ 226,121
Notes payable and current installments of long-term debt........................... 83,526 96,710
Income taxes payable............................................................... 384 221
Other current liabilities.......................................................... 33,869 28,425
----------- -----------
Total current liabilities...................................................... 449,000 351,477
----------- -----------
Long-term debt, excluding current installments....................................... 23,667 30,333
Deferred income taxes................................................................ 2,796 2,475
Stockholders' equity:
Capital stock:
Class A preferred stock of $1 par value. Authorized 1,000,000 shares; none
issued.......................................................................... -- --
Common stock of $.10 par value. Authorized 30,000,000 shares; issued 10,040,000
shares.......................................................................... 1,004 1,004
Additional paid-in capital......................................................... 89,528 89,314
Retained earnings.................................................................. 58,874 47,167
----------- -----------
149,406 137,485
Less:
Cost of common shares in treasury of 19,989 in 1995 and 176,182 in 1994.......... (161) (1,533)
Unearned restricted stock........................................................ (470) (362)
----------- -----------
Total stockholders' equity..................................................... 148,775 135,590
----------- -----------
Commitments and contingent liabilities
----------- -----------
$ 624,238 $ 519,875
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
23
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL UNEARNED TOTAL
COMMON PAID-IN RETAINED TREASURY RESTRICTED STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK STOCK EQUITY
----------- ----------- --------- --------- ----------- ------------
Balance at December 26, 1992.................... $ 864 $ 67,086 $ 37,448 $ (3,202) $ (921) $ 101,275
Net earnings.................................... -- -- 11,975 -- -- 11,975
Issuance of 1,400,000 shares through public
offering....................................... 140 21,048 -- -- -- 21,188
Issuance of 2,900 treasury shares as director
compensation................................... -- 26 -- 25 -- 51
Issuance of 110,779 treasury shares under stock
option plans................................... -- 540 -- 975 -- 1,515
Issuance of 19,155 treasury shares as stock
awards, net of forfeitures..................... -- 228 -- 168 91 487
----------- ----------- --------- --------- ----------- ------------
Balance at December 25, 1993.................... 1,004 88,928 49,423 (2,034) (830) 136,491
Net loss........................................ -- -- (2,256) -- -- (2,256)
Issuance of 3,400 treasury shares as director
compensation................................... -- 11 -- 30 -- 41
Issuance of 35,253 treasury shares under stock
option plans................................... -- 209 -- 310 -- 519
Issuance of 16,800 treasury shares as stock
awards, net of forfeitures..................... -- 166 -- 161 468 795
----------- ----------- --------- --------- ----------- ------------
Balance at December 31, 1994.................... 1,004 89,314 47,167 (1,533) (362) 135,590
Net earnings.................................... -- -- 11,707 -- -- 11,707
Issuance of 4,400 treasury shares as director
compensation................................... -- (1) -- 39 -- 38
Issuance of 89,993 treasury shares under stock
option plans................................... -- 240 -- 790 -- 1,030
Issuance of 61,800 treasury shares as stock
awards, net of forfeitures..................... -- (25) -- 543 (108) 410
----------- ----------- --------- --------- ----------- ------------
Balance at December 30, 1995.................... $ 1,004 $ 89,528 $ 58,874 $ (161) $ (470) $ 148,775
----------- ----------- --------- --------- ----------- ------------
----------- ----------- --------- --------- ----------- ------------
See accompanying notes to consolidated financial statements.
24
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(AMOUNTS IN THOUSANDS)
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net earnings (loss)................................................... $ 11,707 $ (2,256) $ 11,975
Adjustments to reconcile net earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization....................................... 19,059 19,766 13,254
Changes in assets and liabilities, net of effects from business
combinations:
Accounts receivable............................................... (75,333) (22,496) (63,902)
Inventories....................................................... (124,296) (41,783) (92,941)
Other current assets.............................................. (610) 463 3,316
Accounts payable.................................................. 105,100 122,961 15,144
Other liabilities................................................. 5,444 5,983 (1,995)
Income taxes...................................................... 1,195 (2,192) (1,701)
------------ ------------ ------------
Net cash provided (used) by operating activities................ (57,734) 80,446 (116,850)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment................................... (10,346) (14,910) (14,230)
Business combinations................................................. -- -- (3,806)
(Advances of) payments from notes receivable.......................... (1,872) 917 909
Other................................................................. (1,051) (1,816) 570
------------ ------------ ------------
Net cash used in investing activities........................... (13,269) (15,809) (16,557)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt.................................. (6,667) -- (18,500)
Proceeds from receivables sold........................................ 100,000 -- --
(Payments of) proceeds from notes payable............................. (13,184) (81,314) 127,041
Proceeds from long-term debt.......................................... -- 17,000 --
Proceeds from offering of public stock................................ -- -- 21,188
Proceeds from the exercise of employee stock options.................. 1,030 519 1,515
------------ ------------ ------------
Net cash provided by (used in) financing activities............. 81,179 (63,795) 131,244
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................... 10,176 842 (2,163)
Cash and cash equivalents, beginning of year............................ 10,514 9,672 11,835
------------ ------------ ------------
Cash and cash equivalents, end of year.................................. $ 20,690 $ 10,514 $ 9,672
------------ ------------ ------------
------------ ------------ ------------
See accompanying notes to consolidated financial statements.
25
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
The consolidated financial statements include the accounts of InaCom Corp.
(Company) and its wholly-owned subsidiaries. The Company is a leading provider
of management technology services which include technology procurement and
distribution of microcomputer systems, workstations, networking and
telecommunications equipment, systems integration and support services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(B) ACCOUNTS RECEIVABLE
The Company entered into an agreement in June 1995 (which agreement was
amended and restated in August 1995) to sell $100 million of accounts
receivable, with limited recourse, to an unrelated financial institution. New
qualifying receivables are sold to the financial institution as collections
reduce previously sold receivables in order to maintain a balance of $100
million sold receivables. On December 30, 1995, $21.4 million of additional
accounts receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company receivables
have been substantially less than such additional amount. At December 30, 1995,
the interest rate was 6.31%.
(C) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of computer hardware, software, voice and data equipment and related
materials.
(D) OTHER ASSETS
Other assets include vendor authorization rights and long-term notes
receivable. Vendor authorization rights are being amortized over 10 years.
(E) COST IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED
The excess of the cost over the carrying value of assets of business
acquired is being amortized over 20 years. The Company assesses the
recoverability of intangible assets by determining whether the amortization of
the asset balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
(F) DEPRECIATION
Depreciation is provided over the estimated useful lives of the respective
assets ranging from 3 to 31 years using the straight-line method.
(G) INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
26
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) EARNINGS/(LOSS) PER COMMON SHARE
Earnings/(loss) per share of common stock have been computed on the basis of
the weighted average number of shares of common stock outstanding after giving
effect to equivalent common shares from dilutive stock options.
(I) REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer. Revenues from consulting and other services are recognized as the
Company performs the services. Revenues from maintenance and extended warranty
agreements are recognized ratably over the term of the agreement. Extended
warranty costs are accounted for on an accrual basis and are recognized under
the sales method.
(J) MARKETING DEVELOPMENT FUNDS
Primary vendors of the Company provide various incentives for promoting and
marketing their product offerings. The funds received are based on the purchases
or sales of the vendor's products and are earned through performance of specific
marketing programs or upon completion of objectives outlined by the vendors.
Funds earned are applied to direct costs or selling, general and administrative
expenses depending on the objectives of the program. Funds from the Company's
primary vendors typically range from 1% to 3% of purchases.
(K) RISKS AND UNCERTAINTIES
Financial instruments which potentially expose the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells product to a large number of customers in many different
industries and geographies. To minimize credit concentration risk, the Company
utilizes several financial services organizations which purchase accounts
receivable and perform ongoing credit evaluations of its customers' financial
conditions.
The Company's business is dependent in large measure upon its relationship
with key vendors since a substantial portion of the Company's revenue is derived
from the sales of the products of such key vendors. Termination of, or a
material change to the Company's agreements with these vendors, or a material
decrease in the level of marketing development programs offered by
manufacturers, or an insufficient or interrupted supply of vendors' product
would have a material adverse effect on the Company's business.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(L) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximates fair value because of the short
maturity of these instruments. The fair values of each of the Company's
long-term debt instruments are based on the amount of future cash flows
associated with each instrument discounted using the Company's current borrowing
rate for similar debt instruments of comparable maturity. The estimated fair
value of the Company's long-term debt at December 30, 1995 approximate book
value.
27
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers cash and temporary cash investments with a maturity of three months or
less to be cash equivalents.
(2) BUSINESS COMBINATION
In February 1993, the Company completed the acquisition of certain assets
and operations of the Sears Business Centers (the SBC Acquisition) division from
Sears, Roebuck and Co. (Sears). The Company acquired certain fixed assets,
inventory and other assets for approximately $3.8 million, and assumed certain
liabilities, in a transaction accounted for as a purchase. Certain
noncompetition payments are scheduled to Sears for each of the first two years
following the closing date. The minimum payment is $1.0 million annually and the
Company made the first of the two payments in 1994. The 1995 payment was not
made based on offsets claimed by the Company against Sears in pending
litigation. Additional payments were also required based on net revenues (as
defined in the agreement) and gross margins of the acquired SBC operations,
ranging from 1/2% of such net revenues for gross margins of more than 17.5% up
to 1% of such net revenues for gross margins over 20%. The Company was not
required to make such payments in either 1995 or 1994 since the required revenue
and gross margin targets were not achieved. The excess purchase price over the
estimated fair value of the assets was $7.8 million and is being amortized using
the straight-line method over 20 years.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
1995 1994
--------- ---------
Land, buildings and improvements.............................................. $ 10,541 $ 10,310
Furniture, fixtures and equipment............................................. 18,392 14,884
Computer equipment............................................................ 35,340 28,201
Computer parts held for repair and exchange................................... 21,649 22,383
--------- ---------
$ 85,922 $ 75,778
--------- ---------
--------- ---------
(4) INCOME TAXES
Income tax expense (benefit) consists of the following:
1995 1994 1993
--------- --------- ---------
Current:
Federal............................................................... $ 6,151 $ 487 $ 4,269
State................................................................. 943 92 488
Deferred:
Federal............................................................... 897 (1,789) 2,811
State................................................................. 135 (283) 379
--------- --------- ---------
$ 8,126 $ (1,493) $ 7,947
--------- --------- ---------
--------- --------- ---------
28
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) INCOME TAXES (CONTINUED)
The reconciliation of the statutory Federal income tax rate and the effective
tax rate are as follows:
1995 1994 1993
----------- ----------- -----------
Statutory Federal income tax rate.......................................... 35.0% 34.0% 35.0%
State income taxes, net of Federal benefit................................. 3.6 4.7 1.6
Other...................................................................... 2.4 1.1 3.8
--- --- ---
41.0% 39.8% 40.4%
--- --- ---
--- --- ---
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
1995 1994
--------- ---------
Deferred tax assets:
Valuation reserves............................................................ $ 3,324 $ 3,024
Accrued expenses not deducted until paid...................................... 1,275 1,892
Other......................................................................... 2 635
--------- ---------
Total deferred tax assets................................................... 4,601 5,551
--------- ---------
Deferred tax liabilities:
Depreciation.................................................................. 2,725 2,524
Other......................................................................... 470 589
--------- ---------
Total deferred tax liabilities.............................................. 3,195 3,113
--------- ---------
Net deferred tax assets..................................................... $ 1,406 $ 2,438
--------- ---------
--------- ---------
In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, ACCOUNTING FOR INCOME TAXES, and has reported the cumulative effect of that
change in the method of accounting for income taxes in the 1993 consolidated
statement of operations.
There was no valuation allowance for deferred tax assets at December 30,
1995 or December 31, 1994.
(5) NOTES PAYABLE AND LONG-TERM DEBT
The Company's primary sources of liquidity are provided through a working
capital financing agreement for $350.0 million and $30.3 million in two private
placement notes.
The Company entered into a working capital financing agreement in June 1995
with a financial services organization and terminated previous revolving credit
facilities. The $350.0 million working capital financing agreement expires June
29, 1998. At December 30, 1995, $76.9 million was outstanding under the working
capital line and the interest rate based on LIBOR was 7.68%. The working capital
financing agreement is secured by accounts receivable and inventory.
29
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(5) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
A summary of long-term debt follows:
1995 1994
--------- ---------
Private placement notes (a)................................................... $ 30,334 $ 37,000
Capital lease obligations..................................................... -- 43
--------- ---------
Total long-term debt...................................................... 30,334 37,043
Less current installments..................................................... 6,667 6,710
--------- ---------
Long-term debt, excluding current installments............................ $ 23,667 $ 30,333
--------- ---------
--------- ---------
- ------------------------
(a) The two private placement notes are held by unaffiliated insurance
companies. The remaining principal amount of the first note, $13.3 million,
is payable in two annual installments of $6.7 million commencing on May 31,
1996 and bears interest at 10.31% payable quarterly. The principal amount of
the second note, $17.0 million, is payable in five annual installments of
$3.4 million commencing on February 28, 1997 and bears interest at 6.83%
payable quarterly. The notes are secured by accounts receivable and
inventory.
The working capital and debt agreements contain certain restrictive
covenants, including the maintenance of minimum levels of working capital,
tangible net worth, fixed charge coverage, limitations on incurring additional
indebtedness and restrictions on the amount of net loss that the Company can
incur. The Company was in compliance with the covenants contained in the
agreements at December 30, 1995.
The minimum aggregate maturities of long-term debt are $6.7 million in 1996,
$10.0 million in 1997 and $3.4 million in 1998 through 2001.
(6) COMMON STOCK
In May 1993, the Company completed the sale of 1.4 million shares of newly
issued common stock in an underwritten public offering at $16.00 per share. The
net proceeds to the Company from the sale were approximately $21.2 million.
(7) CREDIT ARRANGEMENTS
The Company has floor plan agreements to take advantage of vendor financing
programs. The agreements were secured by $111.9 million of the Company's
inventory at December 30, 1995 and $86.0 million at December 31, 1994. 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 $7.9
million at December 30, 1995 and $3.2 million at December 31, 1994 relating to
these agreements.
(8) LEASES
The Company operates in leased premises which include the general offices,
warehouse facilities and Company-owned branches. Operating lease terms range
from monthly to ten years and generally provide for renewal options.
Rent expense for operating leases was approximately $9.8 million, $8.6
million and $7.0 million for the three years ended December 30, 1995,
respectively.
30
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) LEASES (CONTINUED)
Future minimum operating lease obligations for the years 1996 through 2000
are $7.8 million, $6.6 million, $4.7 million, $3.2 million and $1.8 million,
respectively. It is anticipated that leases will be renewed or replaced as they
expire such that future lease obligations will approximate rent expense for
1995.
(9) EMPLOYEE RETIREMENT BENEFIT PLAN
The Company maintains a qualified savings plan under Section 401(k) of the
Internal Revenue Code which covers substantially all full-time employees. Annual
contributions to the qualified plan, based on participant's annual pay, are made
by the Company. Participants may also elect to make contributions to the plan.
Employee contributions are matched by the Company up to limits prescribed by the
Internal Revenue Code. Company contributions to the plan approximated $2.4
million in 1995, $1.8 million in 1994 and $2.0 million in 1993.
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 significant.
(10) LITIGATION
The Company is involved in a limited number of legal actions. Management
believes that the ultimate resolution of all pending litigation will not have a
material adverse effect on the Company's consolidated financial statements.
(11) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are summarized as follows:
1995 1994 1993
--------- --------- ---------
Interest paid......................................................... $ 14,054 $ 12,599 $ 7,668
Income taxes paid..................................................... 6,931 890 7,130
Components of cash used for acquisitions as reflected in the consolidated
statements of cash flows are summarized as follows:
1993
----------
Fair value of assets acquired............................................................... $ 14,331
Liabilities assumed......................................................................... (10,525)
----------
Cash paid at closing, net of cash acquired.............................................. $ 3,806
----------
----------
(12) STOCK OPTION AND AWARD PROGRAMS
The Company has two stock plans approved by the shareholders in 1994 and
1990, and a nonqualified stock option plan approved by shareholders in 1987.
Options granted under the stock plans may be either nonqualified or incentive
stock options. The option price is set by the Compensation Committee of the
Board of Directors of the Company but may not be less than the fair market value
per share at the time the option is granted, and the term of any option granted
may not exceed ten years. The stock plans also permit the issuance of restricted
or bonus stock awards by the Compensation Committee. Options granted under the
nonqualified stock option plan are for a term not to exceed ten years at a price
set by the Compensation Committee but may not be less than the fair market value
per share at the time the option is granted. At December 30, 1995, the Company
had approximately 132,000 shares available for issuance pursuant to subsequent
grants under the plans.
31
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 30, 1995
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(12) STOCK OPTION AND AWARD PROGRAMS (CONTINUED)
Additional information as to shares subject to options is as follows:
NUMBER EXERCISE PRICE
OF OPTIONS PER OPTION
---------- -----------------
Options outstanding at December 26, 1992............................. 673,000 $ 3.90 to 14.62
Granted............................................................ 150,000 19.75
Exercised.......................................................... (111,000) 5.85 to 14.62
Canceled........................................................... (28,000) 3.90 to 14.62
----------
Options outstanding at December 25, 1993............................. 684,000 5.85 to 19.75
Granted............................................................ 193,500 8.00 to 12.00
Exercised.......................................................... (35,000) 7.25 to 14.62
Canceled........................................................... (42,000) 7.02 to 14.50
----------
Options outstanding at December 31, 1994............................. 800,500 5.85 to 19.75
Granted............................................................ 157,000 9.56 to 14.69
Exercised.......................................................... (90,000) 7.25 to 12.00
Canceled........................................................... (68,500) 5.85 to 14.63
----------
Options outstanding at December 30, 1995............................. 799,000 $ 5.85 to 19.75
---------- -----------------
---------- -----------------
Exercisable at December 30, 1995..................................... 384,200 $ 5.85 to 19.75
---------- -----------------
---------- -----------------
32
SCHEDULE II
INACOM CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
BEGINNING COSTS AND WRITTEN END OF
OF PERIOD EXPENSES OFF (1) PERIOD
----------- ----------- ----------- -----------
Fiscal year ended December 30, 1995 -- Allowance for doubtful
accounts........................................................... $ 2,626 $ 2,308 $ 1,397 $ 3,537
----------- ----------- ----------- -----------
Fiscal year ended December 31, 1994 -- Allowance for doubtful
accounts........................................................... $ 2,784 $ 1,691 $ 1,849 $ 2,626
----------- ----------- ----------- -----------
Fiscal year ended December 25, 1993 -- Allowance for doubtful
accounts........................................................... $ 3,162 $ 1,081 $ 1,459 $ 2,784
----------- ----------- ----------- -----------
- ------------------------
(1) The deductions from reserves are net of recoveries.
33
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Omaha, State of Nebraska, on the 22nd day of March, 1996.
InaCom Corp.
By _______/S/_BILL L. FAIRFIELD_______
Bill L. Fairfield, PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of InaCom Corp.
and in the capacities indicated on the 22nd day of March, 1996.
/S/ BILL L. FAIRFIELD President (Principal Executive Officer) and
- ------------------------------------------- Director
Bill L. Fairfield
/S/ DAVID C. GUENTHNER Executive Vice President and Chief Financial
- ------------------------------------------- Officer (Principal Financial and Accounting
David C. Guenthner Officer)
JOSEPH AUERBACH* Director
W. GRANT GREGORY* Director
JOSEPH INATOME* Director
RICK INATOME* Director
GARY SCHWENDIMAN* Director
DURWARD B. VARNER* Director
*Bill Fairfield, by signing his name hereto, signs this Annual Report on behalf of each of
the persons indicated. A power of attorney authorizing Bill L. Fairfield to sign the
Annual Report on Form 10-K on behalf of each of the indicated directors of Inacom Corp.
has been filed herein as Exhibit 24.
/S/ BILL L. FAIRFIELD
- -------------------------------------------
Bill L. Fairfield
ATTORNEY-IN-FACT
34
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- ---------
3.1 Restated Certificate of Incorporation of the Company, with amendments, incorporated by reference
to the Company's Current Report on Form 8-K dated March 30, 1993.
3.2 Bylaws of the Company, as amended to date, incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 24, 1994.
4.1 Inventory Working Capital Financing Agreement dated June 29, 1995 between InaCom and IBM Credit
Corporation, incorporated herein by reference to the Company's quarterly report on Form 10-Q for
the quarter ended July 1, 1995.
4.2 Amended and Restated Receivable Purchase Agreement dated as of August 21, 1995 between InaCom,
InaCom Finance Corp. and certain financial institutions, incorporated herein by reference to the
Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995.
10.1 IBM Business Partner Agreement for IBM Products, dated May 24, 1993 between International
Business Machines Corporation, incorporated herein by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended December 25, 1993.
10.2 COMPAQ Computer Corporation United States Central Purchase Agreement, dated June 9, 1992, between
COMPAQ Computer Corporation and the Company, incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended December 26, 1992.
10.3 Hewlett-Packard Company U.S. Agreement for Authorized Resellers, dated March 1, 1993, between
Hewlett-Packard Company and the Company, incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 26, 1992.
10.4 1987 Stock Option Plan of the Company, incorporated herein by reference to Exhibit 10.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992.
10.5 1990 Stock Plan of the Company, with amendments thereto, incorporated herein by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10.6 1994 Stock Plan of the Company, incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 26, 1994.
10.7 Executive Incentive Bonus Plan of the Company.................................................... 37
10.8 Form of Long-Term Incentive Agreement of the Company, incorporated herein by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992.
10.9 Nonqualified Deferred Compensation Plan of the Company, incorporated herein by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
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EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- ---------
10.10 First Amendment to the Nonqualified Deferred Compensation Plan................................... 45
10.11 Rick Inatome Consulting Agreement, with amendment thereto........................................ 46
10.12 Executive Death Benefit Plan, incorporated herein by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 25, 1993.
10.13 Executive Disability Wage Continuation Plan, incorporated herein by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended September 25, 1993.
10.14 Form of Severance Agreement between the Company and seven of its officers, incorporated herein by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.15 Restricted Stock Agreements between the Company and Bill L. Fairfield, incorporated herein by
reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
10.16 Lease Agreement between the Company and Maple Avenue Limited Liability Company dated September 5,
1994, incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 24, 1994.
11 Statement re: Computation of Earnings per share.................................................. 54
21 Subsidiaries of the Company...................................................................... 55
23 Consent of KPMG Peat Marwick LLP................................................................. 56
24 Powers of Attorney............................................................................... 57
Pursuant to Item 601(h)(4) of Regulation S-K, certain instruments with
respect to the Company's long-term debt are not filed with this Form 10-K. The
Company will furnish a copy of such long-term debt agreements to the Securities
and Exchange Commission upon request.
Management contracts and compensatory plans are set forth as Exhibits 10.4
through 10.15 above.
36