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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 29, 1996
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-16114
INACOM CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0681813
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
10810 FARNAM, SUITE 200
OMAHA, NEBRASKA 68154
(Address of principal executive offices)
Telephone number (402) 392-3900
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months, and (2) has been subject to such filing
requirements for the past ninety days:
Yes /X/ No / /
As of August 1, 1996 there were 10,142,339 common shares of the registrant
outstanding.
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INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
ASSETS
JUNE 29, DECEMBER 30,
1996 1995
----------- ------------
Current assets:
Cash and cash equivalents........................................................... $ 24,835 20,690
Accounts receivable, net............................................................ 201,488 160,306
Inventories......................................................................... 304,363 352,948
Other current assets................................................................ 6,391 5,996
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Total current assets.............................................................. 537,077 539,940
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Other assets, net..................................................................... 20,580 17,831
Cost in excess of net assets of business acquired, net of accumulated amortization.... 29,790 24,966
Property and equipment, net........................................................... 44,407 41,501
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$ 631,854 624,238
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----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 261,530 331,221
Notes payable and current portion of long-term debt................................. 92,667 83,526
Other current liabilities........................................................... 47,472 34,253
----------- ------------
Total current liabilities......................................................... 401,669 449,000
----------- ------------
Long-term debt........................................................................ 68,850 23,667
Other long-term liabilities........................................................... 3,022 2,796
Stockholders' equity:
Capital stock:
Class A preferred stock of $1 par value. Authorized 1,000,000 shares; none
issued........................................................................... -- --
Common stock of $.10 par value. Authorized 30,000,000 shares; issued 10,142,339
shares........................................................................... 1,014 1,004
Additional paid-in capital........................................................ 91,253 89,528
Retained earnings................................................................. 66,288 58,874
----------- ------------
158,555 149,406
Less:
Cost of common shares in treasury of 19,989 in 1995................................. -- 161
Unearned restricted stock........................................................... 242 470
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Total stockholders' equity........................................................ 158,313 148,775
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$ 631,854 624,238
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F-2
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------- ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1966 1995 1996 1995
----------- --------- ----------- -----------
Revenues:
Computer products........................................... $ 718,585 492,369 1,316,307 942,139
Computer services........................................... 30,201 22,184 58,340 44,985
Communications products and services........................ 21,074 12,356 37,294 23,741
----------- --------- ----------- -----------
769,860 526,909 1,411,941 1,010,865
----------- --------- ----------- -----------
Direct costs:
Computer products........................................... 677,760 462,101 1,241,991 883,969
Computer services........................................... 7,347 7,050 15,550 14,363
Communications products and services........................ 16,620 9,370 29,086 18,229
----------- --------- ----------- -----------
701,727 478,521 1,286,627 916,561
----------- --------- ----------- -----------
Gross margin.................................................. 68,133 48,388 125,314 94,304
Selling, general and administrative expenses.................. 55,588 40,361 102,829 79,877
----------- --------- ----------- -----------
Operating income.............................................. 12,545 8,027 22,485 14,427
Interest expense.............................................. 5,046 3,663 9,919 6,480
----------- --------- ----------- -----------
Earnings before income tax.................................... 7,499 4,364 12,566 7,947
Income tax expense............................................ 3,075 1,789 5,152 3,258
----------- --------- ----------- -----------
Net earnings.................................................. $ 4,424 2,575 7,414 4,689
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Earnings per share
Primary..................................................... $ .43 .25 .72 .46
Fully diluted............................................... $ .42 .25 .71 .46
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Common shares and equivalents outstanding...................
Primary................................................... 10,300 10,300 10,300 10,300
Fully diluted............................................. 10,700 10,300 10,500 10,300
----------- --------- ----------- -----------
----------- --------- ----------- -----------
F-3
INACOM CORP. AND SUBSIDIARIES
CONDENSED AND CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
----------------------
JUNE 29, JULY 1,
1996 1995
---------- ----------
Cash flows from operating activities:
Net earnings........................................................................... $ 7,414 4,689
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization........................................................ 9,720 9,831
Increase in accounts receivable...................................................... (41,182) (16,898)
Decrease (increase) in inventories................................................... 48,585 (24,445)
Increase in other current assets..................................................... (395) (41)
(Decrease) increase in accounts payable.............................................. (69,691) 7,238
Increase in other long term liabilities.............................................. 226 --
Increase (decrease) in other current liabilities..................................... 13,219 (1,968)
---------- ----------
Net cash used in operating activities............................................ (32,104) (21,594)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment.................................................... (10,016) (3,197)
Proceeds from notes receivable......................................................... 1,605 568
Increase in other assets............................................................... (10,472) (711)
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Net cash used in investing activities............................................ (18,883) (3,340)
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Cash flows from financing activities:
Proceeds from (payments of) short-term debt............................................ 5,741 (61,043)
Payments of long-term debt............................................................. (6,667) (6,667)
Proceeds from receivables sold......................................................... -- 100,000
Proceeds from sale of convertible subordinated debentures.............................. 55,250 --
Proceeds from exercise of stock options................................................ 808 74
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Net cash provided by financing activities........................................ 55,132 32,364
---------- ----------
Net increase in cash and cash equivalents................................................ 4,145 7,430
Cash and cash equivalents, beginning of the period....................................... 20,690 10,514
---------- ----------
Cash and cash equivalents, end of the period............................................. $ 24,835 17,944
---------- ----------
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F-4
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
The condensed and consolidated financial statements are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The condensed
and consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report to Stockholders incorporated by reference in the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995. The results of
operations for the six months ended June 29, 1996 are not necessarily indicative
of the results for the entire fiscal year ending December 28, 1996.
2. ACCOUNTS RECEIVABLE
The Company entered into an agreement in June 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 June 29, 1996, $20.8 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 June 29, 1996, the
interest rate was 5.9%.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market and consist of computer hardware, software, voice and data equipment and
related materials.
4. LONG TERM DEBT
In June 1996 the Company issued $55.25 million of 6.0% Convertible
Subordinated Debentures due June 15, 2006. The debentures are convertible into
common stock of the Company at a conversion price of $24.00 per share, subject
to adjustments under certain circumstances, beginning on September 19, 1996. The
debentures are not redeemable by the Company prior to June 16, 2000 and
thereafter the Company may redeem the debentures at various premiums to par. The
debentures may also be redeemed at the option of the holder at any time prior to
June 16, 2000 if there is a Change in Control (as defined in the indenture) at a
price equal to 100% of the principal amount plus accrued interest at the date of
redemption.
5. COMMON STOCK
Earnings per share of common stock have been computed on the basis of the
weighted average number of shares of common stock outstanding during each period
presented.
6. MARKETING DEVELOPMENT FUNDS
Primary vendors of the Company provide various incentives, in cash or credit
against obligations, for promoting and marketing their product offerings. The
funds or credits received are based on the purchases or sales of the vendor's
products and are earned through performance of specific marketing programs or
upon completion of objectives outlined by the vendors. Funds or credits earned
are applied to direct costs or selling, general and administrative expenses
depending on the objectives of the program. Funds or credits from the Company's
primary vendors typically range from 1% to 3% of purchases from these vendors.
F-5
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For purposes of the condensed and consolidated statement of cash flows, the
Company considers cash and cash investments with a maturity of three months or
less to be cash equivalents. Interest and income taxes paid are summarized as
follows (dollars in thousands):
1996 1995
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Interest paid...................................................................... $ 9,924 7,203
Income taxes paid.................................................................. $ 1,126 1,526
--------- ---------
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F-6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
The following tables set forth, for the indicated periods, revenue by
classification and the mix of revenue.
THIRTEEN WEEKS THIRTEEN WEEKS ENDED
ENDED
------------------------ ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
----------- ----------- ----------- -----------
(IN THOUSANDS)
Computer products................................................. $ 718,585 $ 492,369 93.3% 93.4%
Computer services................................................. 30,201 22,184 3.9 4.2
Communication products and services............................... 21,074 12,356 2.8 2.4
----------- ----------- ----- -----
Total......................................................... $ 769,860 $ 526,909 100.0% 100.0%
----------- ----------- ----- -----
----------- ----------- ----- -----
TWENTY-SIX WEEKS TWENTY-SIX WEEKS ENDED
ENDED
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JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
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(IN THOUSANDS)
Computer products............................................. $ 1,316,307 $ 942,139 93.2% 93.2%
Computer services............................................. 58,340 44,985 4.1 4.5
Communication products and services........................... 37,294 23,741 2.6 2.3
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Total..................................................... $ 1,411,941 $ 1,010,865 100.0% 100.0%
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Revenues for the second quarter and first six months of 1996 increased
$243.0 million or 46.1% and $401.1 million or 39.7% over the second quarter and
first six months of 1995, respectively. Revenue growth resulted primarily from
computer product sales which increased $226.2 million or 45.9% and $374.2
million or 39.7% over the second quarter and first six months of 1995,
respectively. Revenue from computer services increased $8.0 million or 36.1% and
$13.4 million or 29.7% over the same periods of 1995, respectively. Revenue from
communication products and services increased $8.7 million or 70.6% and $13.6
million or 57.1% over the second quarter and first six months of 1995,
respectively.
Revenues increased primarily as a result of an increase in products shipped
directly to the end-user customer, overall industry growth and the sale of
products to new independent resellers. The increase in computer product sales
resulted from an increase in sales through the independent reseller channel
($150.3 million or 55.9% and $236.6 million or 46.4% over the second quarter and
first six months of 1995, respectively) and through an increase in sales through
the Company-owned business centers ($82.1 million or 34.9% and $144.7 million or
31.7% over the second quarter and first six months of 1995, respectively).
Revenue from computer services increased as a result of increased sales efforts
for such service offerings and the inclusion of these services with increasing
computer product sales. Revenue from communication products and services has
increased as a result of broad based growth from the communications product
offerings.
F-7
GROSS MARGIN
The following tables set forth, for the indicated periods, gross margin and
gross margin percentages by classification.
THIRTEEN WEEKS THIRTEEN WEEKS ENDED
ENDED
-------------------- ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
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(IN THOUSANDS)
Computer products................................................... $ 40,825 $ 30,268 5.7% 6.2%
Computer services................................................... 22,854 15,134 75.7 68.2
Communication products and services................................. 4,454 2,986 21.1 24.2
--------- --------- ----- -----
Total........................................................... $ 68,133 $ 48,388 8.9% 9.2%
--------- --------- ----- -----
--------- --------- ----- -----
TWENTY-SIX WEEKS TWENTY-SIX WEEKS ENDED
ENDED
---------------------- ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
----------- --------- ----------- -----------
(IN THOUSANDS)
Computer products.................................................. $ 74,316 $ 58,170 5.7% 6.2%
Computer services.................................................. 42,790 30,622 73.4 68.1
Communication products and services................................ 8,208 5,512 22.0 23.2
----------- --------- ----- -----
Total.......................................................... $ 125,314 $ 94,304 8.9% 9.3%
----------- --------- ----- -----
----------- --------- ----- -----
The decrease in the Company gross margin percentage for the second quarter
and first six months of 1996 versus the same period in 1995 is primarily a
result of the decrease in the gross margin percentage on computer products.
However, the gross margin percentage in computer product sales increased from
5.6% in the first quarter of 1996 to 5.7% in the second quarter of 1996. The
decrease in gross margin percentage for the computer products resulted primarily
from a greater proportion of lower margin independent reseller channel sales in
the second quarter and first six months of 1996 versus higher margin computer
product sales in the Company-owned business centers.
The increase in the gross margin percentage for computer services resulted
from an increase in the mix of services to include more higher margin systems
integration services versus the support and technology procurement services. The
decrease in gross margin percentage for the communication products and services
resulted from an increase in mix of revenues which included more lower margin
communications product sales as compared to the higher margin long distance and
non-product services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter
and first six months of 1996 increased $15.2 million or 37.7% and $23.0 million
or 28.7% over the second quarter and first six months of 1995, respectively.
SG&A as a percent of revenue was 7.2% in the second quarter of 1996 versus 7.7%
in the second quarter of 1995, and 7.3% for the first six month of 1996 versus
7.9% for the first six months of 1995. The increase in spending resulted
primarily from the costs of handling the increased product, services and
communications revenues. The decrease in SG&A as a percent of revenue resulted
from leverage achieved through operational efficiencies resulting from current
and prior period investments in distribution center automation, information
systems and computer service offerings.
INTEREST EXPENSE
Interest expense for the second quarter and first six months of 1996 was
$5.0 million and $9.9 million, respectively, versus interest expense for the
second quarter and first six months of 1995 of $3.7 million and $6.5 million,
respectively. Interest expense increased due to higher average daily borrowings.
Average daily borrowings for the second quarter of 1996 were $97.4 million more
than the
F-8
average borrowings for the same period in the prior year, and $110.5 million
more for the first six months of 1996 than the average daily borrowings for the
same period in 1995. The average borrowing rate for the second quarter decreased
approximately 0.8 of a percentage point from the same period in the prior year,
and 1.0 percentage point for the first six months of 1996 versus the same period
in 1995. The increase in the average daily borrowings resulted from the
Company's decision in the first quarter of 1996 to take advantage of early pay
discounts offered by some of the Company's major vendors and an increase in
accounts receivable resulting from the increase in revenues. The decrease in the
average borrowing rate resulted from the Company selling $100 million of
accounts receivable in June 1995 and the issuance of $55.25 million of 6%
convertible subordinated debentures in June 1996 (see "Financial Condition and
Liquidity").
NET EARNINGS
The following tables set forth, for the indicated periods, net earnings by
classification and mix of net earnings.
THIRTEEN WEEKS ENDED THIRTEEN WEEKS ENDED
-------------------- ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
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(IN THOUSANDS)
Computer products...................................................... $ 2,544 $ 1,387 57.5% 53.9%
Computer services...................................................... 1,669 989 37.7 38.4
Communication products and services.................................... 211 199 4.8 7.7
--------- --------- ----- -----
Total.............................................................. $ 4,424 $ 2,575 100.0% 100.0%
--------- --------- ----- -----
--------- --------- ----- -----
TWENTY-SIX WEEKS TWENTY-SIX WEEKS ENDED
ENDED
-------------------- ------------------------
JUNE 29, JULY 1, JUNE 29, JULY 1,
1996 1995 1996 1995
--------- --------- ----------- -----------
(IN THOUSANDS)
Computer products...................................................... $ 4,102 $ 2,359 55.3% 50.3%
Computer services...................................................... 2,796 1,998 37.7 42.6
Communication products and services.................................... 516 332 7.0 7.1
--------- --------- ----- -----
Total.............................................................. $ 7,414 $ 4,689 100.0% 100.0%
--------- --------- ----- -----
--------- --------- ----- -----
Net earnings were $4.4 million resulting in primary earnings per share of
$.43 and fully diluted earnings per share of $.42 for the quarter ended June 29,
1996 versus $2.6 million for primary and fully diluted earnings per share of
$.25 for the corresponding period in 1995. The net earnings were $7.4 million
resulting in primary earnings per share of $.72 and fully diluted earnings per
share of $.71 for the first six months of 1996 versus $4.7 million for primary
and fully diluted earnings per share of $.46 for the corresponding period in
1995. This increase resulted from the factors discussed above.
FINANCIAL CONDITION AND LIQUIDITY
The Company's primary sources of liquidity are provided through a working
capital financing agreement for $350.0 million, convertible subordinated
debentures of $55.25 million, a revolving credit facility for $40.0 million and
$23.7 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 June 29, 1996, $42.6 million was outstanding under the working
capital line and the interest rate was 7.4% based on LIBOR. The working capital
financing agreement is secured by accounts receivable and inventory.
In June 1996 the Company issued $55.25 million of 6.0% convertible
subordinated debentures due June 15, 2006. The debentures are convertible into
common stock of the Company at a conversion price of $24.00 per share, subject
to adjustments under certain circumstances, beginning on September 19, 1996. The
debentures are not redeemable by the Company prior to June 16, 2000 and
F-9
thereafter the Company may redeem the debentures at various premiums to par. The
debentures may also be redeemed at the option of the holder at any time prior to
June 16, 2000 if there is a Change in Control (as defined in the indenture) at a
price equal to 100% of the principal amount plus accrued interest at the date of
redemption. The net proceeds from the sale of the 6% debentures were used to
reduce a portion of the outstanding balance of the working capital financing
agreement which carried an interest rate at the time of the debenture sale of
7.3%.
The Company entered into a revolving credit facility agreement in February
1996 with a financial institution. The $40.0 million revolving credit facility
agreement expires in February 1997. At June 29, 1996, $40.0 million was
outstanding under the revolving credit facility and the interest rate was 6.8%
based on LIBOR. The revolving credit facility is secured by accounts receivable
and inventory.
The two private placement notes are held by unaffiliated insurance
companies. The principal amount of the first note, $6.7 million, is due on May
31, 1997 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 Company has agreed to redeem the installments of the second note
aggregating $6.8 million due in 2000 and 2001 on or after October 1, 1996 upon
the request of the holders.
The 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. Certain
covenants effectively limit the amount of dividends which the Company may pay to
the stockholders. The amount of retained earnings at June 29, 1996 not
restricted as to payment of cash dividends under the most restrictive covenants
in such agreements was approximately $38.0 million. The Company was in
compliance with the covenants contained in the agreements at June 29, 1996.
Long-term debt was 30.3% of total long-term debt and equity at June 29, 1996
versus 14.4% at July 1, 1995. The increase is primarily a result of the increase
in long-term debt from the sale of $55.25 million of convertible subordinated
debentures during the second quarter of 1996.
The Company entered into an agreement in June 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 June 29, 1996, $20.8 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 June 29, 1996, the
implicit interest rate on the receivables sale transaction was 5.9%.
During the first six months of 1996 the Company used $32.1 million of cash
in operations. Inventory decreased by $48.6 million during the first six months
of 1996 with the decrease offset by a reduction in accounts payable of $69.7
million. Accounts receivable increased $41.2 million during the first six months
of 1996. Inventory decreased during the six month period as a result of an
increase in inventory turns and accounts payable decreased as a result of the
Company taking advantage of early pay discounts offered by some of the Company's
major vendors. Accounts receivable increased during the first half of 1996 as a
result of the increase in revenues.
Cash used in investing activities for the first six months of 1996 totaled
$18.9 million, of which $10.0 million resulted from additions to property and
equipment. Cash provided from financing activities for the first six months of
1996 totaled $55.1 million resulting from proceeds received from the sale of
convertible subordinated debentures.
The Company believes the funds expected to be generated from operations and
provided by existing credit facilities will be sufficient to meet working
capital and capital investment needs in 1996.
F-10
INACOM CORP. AND SUBSIDIARIES
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
4.1 Indenture dated June 14, 1996 between the Company and First National
Bank of Omaha, and related Debenture, with respect to $55.25 million
convertible subordinated debentures due June 15, 2006.
b) Reports on Form 8-K.
The Company filed an 8-K current report dated June 19, 1996 reporting the
Rule 144A private placement of $55.25 million of 6% Convertible Subordinated
Debentures due June 15, 2006.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf and by the
undersigned hereunto duly authorized.
INACOM CORP.
By_/s/ DAVID C. GUENTHNER_____________
David C. Guenthner
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated this 13th day of August, 1996.