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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 28, 1996 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 February 28,
1997 as reported on NASDAQ National Market System, was approximately
$395,000,000.
At February 28, 1997 there were outstanding 10,850,008 common shares of the
Company.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's Annual Meeting of Stockholders
to be held on April 22, 1997, are incorporated by reference in Part III of this
Form 10-K Report.
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PAGE 1 OF 65
INDEX TO EXHIBITS, PAGE 39
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 to the end-user business
client. Inacom sells computer services, computer products, and communication
products and services to a targeted client base consisting primarily of large
and medium-sized corporate clients. Inacom's products and services are offered
both independently and in conjunction with one another, which enables Inacom to
provide a broad range of tailored solutions to meet specific client needs.
Inacom's strategy is to be a single source, long-term provider of products and
services designed to help businesses optimize information technology investments
and control ongoing costs throughout the life cycle of the client's technology
systems.
HISTORY
The Company has been engaged in the distribution of computer products and
computer services since October 1982 and communications products and services
since February 1987. 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.
Inacom historically has grown as a leading seller of computer products. The
Company changed its strategic direction in the 1990's to meet the evolving
technology needs of its business clients. With the proliferation and increasing
complexity of computer products, information technology and related services,
businesses began searching for a single source, long-term provider to design and
manage their technology systems and control costs. Inacom's growth strategy
begins with its proprietary distribution systems which enable it to deliver
fully-designed and configured computer and communications systems to its
end-user business clients. The resulting contacts with end users provide
opportunities to build ongoing client relationships and provide such clients
with more comprehensive and higher margin computer services.
The Company has effected several significant acquisitions since 1991. 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 proceeding the merger from 322 business center locations. In 1993, the
Company purchased certain assets of Sears Business Centers ("SBC") from Sears,
Roebuck & 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 acquires businesses to enhance the
Company's presence in selected geographic markets and service areas and to
enhance its service and communications capabilities. For example, during 1996,
the Company acquired Technology Express, a leading network integrator in the
Nashville, Tennessee market in April 1996 for $6.4 million in cash and stock;
Computer Access International, Inc., a rental, lease, sales and service of
personnel equipment business in the Englewood, Colorado and Chicago, Illinois
areas for $14.5 million in cash and stock; and three network consulting
providers in December 1996: Networks, Inc. in Fort Lauderdale, Florida for $3
million in stock, Perigee Communications, Inc. in Minneapolis, Minnesota for $9
million in stock and Gorham Clark, Inc. in New York for $13.4 million in cash
and stock.
COMPUTER PRODUCTS
Computer products include microcomputers, workstations, servers, monitors,
printers and operating systems software. Inacom currently distributes computer
products for leading vendors such as COMPAQ, IBM, Hewlett-Packard, Toshiba,
Apple, NEC, Epson, Okidata, Lexmark, NCR, Novell, Banyan, Microsoft, Oracle,
3Com, SynOptics, SCO and Network General. Sales of computer products accounted
for 93.0% of Inacom's revenues and 51.8% of Inacom's earnings in 1996.
2
PROCUREMENT. Procurement involves all activities which precede transfer of
item ownership, including: business processes for purchase forecasting; needs
analysis; product specification and requisitions; purchase order management;
order processing, tracking, and status reporting; financing; "build to order;"
shipment tracking; order receiving, lost item tracking; order invoicing and
invoice payments; and acceptance. As a result of its quantity purchasing
capability, Inacom generally obtains volume discounts from its vendors, enabling
it to sell products on a more favorable basis than clients could attain on their
own. Inacom's advanced distribution and configuration capabilities allow Inacom
to fully configure (add enhancement boards, networking products and software,
and test the complete system) and ship products directly to an end-user client.
Inacom provides procurement services through the use of Inacom's proprietary
Vision, Vista and Direct Express systems.
Vision -- Inacom's Vision 2000 software is an automated catalog and
configurator which allows a business client to obtain product information
from the client's desk top computer. The client can determine product and
specific feature availability, product pricing and maintenance pricing
and can also determine component compatibility to configure the client's
systems.
Vista -- Inacom's Vista software enables a business client to enter
orders directly from the client's desk top computer, track the order
status from placement through delivery, and obtain inventory, credit and
cash flow management information.
Direct Express -- Inacom's Direct Express delivery program reduces the
number of steps in the distribution process by shipping products directly
to the address selected by the business client.
DISTRIBUTION NETWORK. Computer products and services are sold through a
distribution network of more than 1,000 business centers located throughout the
United States. Inacom has international affiliations in Europe, Asia, Central
and South America, Canada and Mexico in order to service the technology
management needs of its multinational clients.
The following table sets forth information at December 28, 1996 with respect
to the number of business centers owned and operated by the Company, and the
reseller channel comprised of independently owned business centers,
participating in the Company's distribution network:
BUSINESS CENTERS 1996 1995 1994 1993 1992
- ------------------------------------------------------------- --------- --------- --------- --------- ---------
Company-owned................................................ 51 45 46 53 50
Independent reseller channel................................. 985 972 1,316 1,417 1,152
--------- --------- --------- --------- ---------
Total.................................................... 1,036 1,017 1,362 1,470 1,202
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
The decrease in the number of independent resellers in recent years 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.
The Company-owned business centers provide a variety of computer products
and computer services which include logistics services, support services,
systems integration services and professional management services. Inacom's
direct sales force in Company-owned business centers enables Inacom to establish
relationships with major corporate clients for purposes of marketing Inacom's
technology management services and communication products and services.
The Company's independent reseller channel consists of franchisees, systems
integrators and value added resellers. Through its indirect division, Inacom
resells products on a wholesale basis to a large base of franchisees, system
integrators and value-added resellers and receives a mark-up fee or, in some
cases, a
3
royalty. 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.
VENDORS. Inacom has negotiated purchase arrangements, including price,
delivery, training and support, directly with most major vendors. During the
fiscal year ended December 28, 1996, sales of COMPAQ, IBM and Hewlett-Packard
products accounted for approximately 26%, 24% and 15%, respectively, of Inacom's
revenues. Inacom's agreements with its vendors are generally on a non-exclusive
basis and may be terminated by the vendors on notice typically ranging from 30
to 90 days. The agreements with vendors generally contain provisions with
respect to product cost, price protection, returns and product allocations;
Inacom is entitled to price protection with all major vendors on eligible
products in Inacom's inventory in the event of vendor price reductions. Certain
vendors also sponsor payment programs with several financial service
organizations to facilitate product sales through the business centers. In
addition, the primary vendors of Inacom provide various incentives for promoting
and marketing their product offerings. Funds or credits received by Inacom are
based either on the sales of the vendor's products through the independent
reseller and Inacom-owned channels, or on Inacom's purchases from the respective
vendor. These funds or credits from Inacom's primary vendors typically range
from 1% to 3% of purchases. The funds or credits 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 Inacom are
cooperative 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 Inacom's purchases from the vendor and generally must be used
for market development activities approved by the respective vendor. Vendor
rebates are based upon Inacom attaining purchase volume targets established with
the vendor. Rebates generally can be used at Inacom's discretion.
COMPUTER SERVICES
Inacom has developed a broad range of life cycle management computer
services to help its business clients manage their information technology. These
services generally have higher gross margins than procurement services. These
services include logistics services, support services, system integration
services and professional management services, and can be purchased individually
or as components of a complete package. Inacom intends to add new services to
further assist its business clients with the management of information
technology. Computer services generated 4.4% of Inacom's revenues and 39.4% of
Inacom's earnings in 1996.
LOGISTICS SERVICES. Logistics services include those basic services
associated with the distribution of computer hardware and software to the
end-user client. These services include product configuration in which Inacom
installs and tests the particular software and peripherals required by the
client, direct shipment of products to one or more locations for the client and
special order handling, such as electronic order entry and the management of
client-owned inventory.
SUPPORT SERVICES. Support services include leasing, providing demo
equipment, help desk, training, maintenance, and installation for computers,
communication equipment and network cabling. Inacom provides extensive services
which assist both its independent reseller and end-user clients manage ongoing
support and training including help desk management and on-site and remote
training classes. Help desk
4
services include total call center management, call receipt, classification and
problem diagnosis, problem resolution or dispatch, and performance monitoring.
Inacom offers a toll-free hotline to professionals that manage computer networks
using operating systems from a number of leading vendors including Novell,
Banyan, Microsoft, IBM, Apple and SCO. Inacom's program of hardware maintenance,
installation and support provides clients with options ranging from depot repair
to on-site "break and fix" support and service coverage at multiple locations
and is supported by a central service dispatch and service call tracking
organization.
SYSTEM INTEGRATION SERVICES. System integration services include systems
design and consulting which help clients design a system and select products
that are appropriate for their specific needs and project planning and
management services. These services permit Inacom to assist a client in the
actual implementation of a system, and system management services in which
Inacom works with a client to implement all aspects of network management,
database management, security management, software distribution and license
control and data administration.
PROFESSIONAL MANAGEMENT SERVICES. Professional management services combine
many of the services described above into a complete life cycle management
product portfolio. These services include service delivery, asset management and
procurement management. Service delivery comprises the labor and management
required actually to manage a client's service organization, such as handling
service requests, generating work orders, managing personnel (Inacom and
client), and managing service parts inventories. Asset management consists of
the registration, tracing and disposal of computer hardware and software as it
moves throughout an organization. Asset management services are becoming
increasingly important as businesses attempt to understand what capabilities
their existing computers have and whether, when and how to upgrade to the latest
technology. Under procurement management, Inacom handles the entire purchasing
process for its client and generally has its own personnel at a client location
managing the process. This function draws upon Inacom's capabilities described
above, including system design and planning, needs analysis, product
specification and requisitions, purchase order management, order processing and
tracking, financing and leasing, configuration, testing and delivery and
installation.
COMMUNICATION PRODUCTS AND SERVICES
Communication products and services include phone systems, voice mail, voice
processing, data network equipment, multiple small office/home office offerings
and maintenance. Inacom also offers network services including long distance,
800 service, calling cards, wide area value-added data networking, video
conferencing and cellular communications. Communication products and services
accounted for 2.6% of Inacom's revenues and 8.8% of Inacom's earnings in 1996.
Inacom provides communication services using its North American Support
Center as a single point of contact for all data and voice cabling and wiring
needs. Inacom also offers project management, maintenance and 24-hour technical
support through a network of independent certified technicians and customer
support personnel. Inacom provides complete communication system design,
installation and maintenance.
DISTRIBUTION NETWORK. Communication products and services were provided at
December 28, 1996 through a network of 18 direct sales offices and contractual
relationships with approximately 160 dealers.
VENDORS. The products of Lucent Technologies and the services of AT&T
constitute approximately 90% of the voice and data systems sold by Inacom.
NETWORK SERVICES. Inacom provides network services with advanced digital
capabilities enabling voice, data and video communications utilizing AT&T,
Frontier and Westinghouse networks. Services include long distance, inbound 800
service, calling cards and teleconferencing featuring account codes, enhanced
billing and customized call reports which allow business clients to restrict and
track telecommunications activity.
5
CONVERGENT TECHNOLOGY SERVICES. Inacom offers convergence solutions
centered around wide area data networks, computer telephone integration, desktop
video conferencing and wireless data communications. These services include
specialized support programs, maintenance programs and specialized software.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS AND EXPORT SALES
The Company has no foreign locations or material export sales. To satisfy
the technology management service needs of its multinational clients, Inacom has
established affiliations with the International Computer Group (Europe, the
Middle East, Africa and Asia). Inacom Latin America, Inacom's 60% owned
subsidiary based in Miami, Florida, provides international logistics and
configuration services in Mexico, the Caribbean, Central and South America.
SEASONAL FACTORS IN BUSINESS
The fourth quarter of the Company's fiscal year generally produces higher
revenues, due principally to year-end purchases by business customers.
CLIENTS
Inacom believes its client base of large and medium-sized businesses is most
likely to benefit from the cost savings obtainable through the technology
management services offered by Inacom. Inacom is not dependent for a material
part of its business upon a single or a few clients and the loss of any one
client would not have a material adverse effect on Inacom's business.
SERVICE MARK AND TRADEMARK
Inacom holds United States service mark and trademark registrations for the
marks "Inacom", "ValCom" and "Inacomp." Inacom also has certain state
registrations. Inacom claims common law rights to the marks based on adoption
and use. To Inacom'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
Inacom is subject to a substantial number of federal and state law
regulating franchise relationships and telecommunication services. Inacom is
registered with federal and state regulatory agencies with respect to the offer
and sale of franchises and the sale of telecommunications services. Inacom
believes it is in substantial compliance with all such laws and regulations.
COMPETITION
All aspects of the technology management services industry are highly
competitive. Inacom's distribution network competes for potential clients,
including national accounts, with numerous other resellers and distributors.
Several computer manufacturers have expanded their channels of distribution,
pricing and product positioning and compete with Inacom's distribution network
for potential clients. Additionally, several computer manufacturers in recent
years lessened or eliminated requirements upon independent resellers to purchase
products from a single source resulting in "open sourcing" of their products;
previously, such manufacturers had typically required independent resellers
having contractual relationships with Inacom to purchase their products from
Inacom. Other competitors operate mail-order or discount stores offering clones
of major vendor products. Inacom also competes with other computer technology
sellers in the recruitment and retention of franchisees and independently-owned
resellers. Inacom competes in the computer services division with a large number
of service providers, including IBM through ISSC, Andersen Consulting, EDS,
ENTEX, CompuCom and Vanstar. Competition in communication products and services
is also intense, and includes entities which are also significant
6
vendors of Inacom, such as Lucent Technologies and AT&T. Certain competitors and
manufacturers are substantially larger than Inacom and may have greater
financial, technical, service and marketing resources. Inacom's distribution
network competes primarily on the basis of professionalism and client contact,
quality of product line, availability of products, service, after-sale support,
price, and quality of end-user training.
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.
Inacom believes its ability to deliver technology management services which
consist of technology procurement services, system integration services and
support services provides its client base with value added services that should
differentiate Inacom from alternative distribution channels and should mitigate
the impact of added competitive pressures caused by economic conditions and
manufacturers' continuing expansion of their channels of distribution, pricing
and product positioning.
NUMBER OF EMPLOYEES
Inacom had 2,874 employees on December 28, 1996. None of the employees are
covered by a collective bargaining agreement. The Company considers its
relations with employees to be good.
BACKLOG
The backlog of orders for products distributed by the Company was $59.3
million at the close of the 1996 fiscal year compared to $35.5 million at the
close of the 1995 fiscal year and $43.8 million at the close of the 1994 fiscal
year. 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.
CERTAIN BUSINESS FACTORS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION
RELATING TO INACOM THAT ARE BASED ON THE BELIEFS OF INACOM MANAGEMENT AS WELL AS
ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO INACOM MANAGEMENT.
SUCH STATEMENTS REFLECT THE CURRENT VIEW OF INACOM WITH RESPECT TO FUTURE EVENTS
AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS, INCLUDING THE
FACTORS DESCRIBED IN THIS REPORT. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS BELIEVED,
ESTIMATED OR EXPECTED.
DEPENDENCE UPON KEY VENDORS
Inacom's business is dependent in large measure upon its relationship with
key vendors. A substantial portion of Inacom's computer products revenue is
derived from the sales of the products of key vendors, including COMPAQ, IBM and
Hewlett-Packard. During the fiscal year ended December 28, 1996, sales of
COMPAQ, IBM and Hewlett-Packard products accounted for approximately 26%, 24%
and 15%, respectively, of the Company's revenues. A substantial portion of
Inacom's communications products and services revenue is derived from the sales
of products of other key vendors, including products from Lucent Technologies
and services from AT&T. Although Inacom considers its relationships with its key
vendors to be good, there can be no assurance that these relationships will
continue as presently in effect or that changes in marketing by one or more such
key vendors and other suppliers would not adversely affect Inacom. Inacom's
agreements with these vendors are on a non-exclusive basis and may be terminated
by the vendors on notice typically ranging from 30 to 90 days. Termination of,
or a material change to, or a nonrenewal of Inacom's agreements with COMPAQ,
IBM, Hewlett-Packard, Lucent Technologies or AT&T, a material decrease in the
level of marketing development programs offered by computer vendors, or an
insufficient or interrupted supply of vendors' product would have a material
adverse effect on Inacom's business. See "Business -- Computer Products --
Vendors."
7
IMPACT OF VENDOR INCENTIVE FUNDS
The key vendors of Inacom provide various incentives for promoting and
marketing their product offerings. Funds or credits received by Inacom are based
either on the sales of the vendor's products through the independent reseller
and Inacom-owned channels, or on Inacom's purchases from the respective vendor.
The three major forms of vendor incentives received by Inacom are coop funds,
market development funds and vendor rebates. The funds or credits are earned
through performance of specific marketing programs or upon completion of
objectives outlined by the vendors. These funds or credits from Inacom's primary
vendors typically range from 1% to 3% of purchases by Inacom. A material
decrease in the level of vendor incentive funding or credits would have a
material adverse effect on Inacom's business. See "Business -- Computer Products
- -- Vendors."
INVENTORY MANAGEMENT RISKS
The personal computer industry is characterized by rapid product improvement
and technological change resulting in relatively short product life cycles and
rapid product obsolescence, which can place inventory at considerable valuation
risk. Inacom's suppliers generally provide price protection intended to reduce
the risk of inventory devaluation. There can be no assurance that vendors will
continue such policies or that unforeseen new product developments and related
inventory obsolescence will not materially adversely affect Inacom's business.
FUNDING REQUIREMENTS; INTEREST RATE SENSITIVITY
Inacom's business requires significant working capital to finance product
inventory and accounts receivable. Inacom has funded its working capital
requirements through a working capital financing agreement, a revolving credit
facility and the public sale of debentures. There can be no assurance that the
existing creditors will continue to finance Inacom's operations at levels that
are adequate or at all. The borrowings under these agreements bear a floating
rate of interest. Inacom's operating results are highly sensitive to changes in
interest rates. A change in interest rates could have a material adverse effect
on Inacom's business. There can be no assurance that sufficient equity or debt
financing will be available on terms acceptable to Inacom or that Inacom will be
able to refinance its existing indebtedness. The inability of Inacom to
refinance its existing indebtedness or to obtain a sufficient amount of
alternative financing would have a material adverse effect on Inacom's business.
DEPENDENCE UPON KEY MANAGEMENT AND TECHNICAL PERSONNEL
Inacom's success depends to a significant extent on its ability to attract
and retain key personnel. Inacom is particularly dependent on its senior
management team and technical personnel. Inacom's strategy for growth in the
sale of computer services and communication services depends on its ability to
attract and retain qualified technical personnel, including systems engineers
and communications specialists. Competition for technical personnel is intense
and no assurance can be given that Inacom will be able to recruit and retain
such personnel. The failure to recruit and retain senior management and
technical personnel could have a material adverse effect on Inacom's business.
ACQUISITIONS
Inacom's strategy includes effecting acquisitions and strategic
relationships in selected geographic market and service areas. Acquisitions
involve a number of special risks, including the incorporation of acquired
products and services into Inacom's offerings, the potential loss of key
employees of the acquired business and the valuation of the acquired business.
Inacom expects to issue equity securities to consummate certain acquisitions,
which may cause dilution to current stockholders. No assurance can be given that
Inacom will have adequate resources to consummate acquisitions or that any such
acquisitions will be successful in enhancing Inacom's business. See "Business --
History."
8
PROPRIETARY DISTRIBUTION CAPABILITIES
Inacom relies upon its proprietary distribution processes, including Vision,
Vista and Direct Express to provide it with a competitive advantage. Inacom
seeks to protect these proprietary product procurement processes. However, it is
possible for third parties to replicate aspects of Inacom's software, systems
and processes or to obtain and use information similar to that which Inacom
regards as proprietary. No assurance can be given that the protective measures
taken by Inacom will be sufficient to preclude competitors from developing
competing or similar proprietary software, systems and processes. See "Business
- -- Computer Services."
OPERATING MARGIN RISKS
Gross margins from the sale of computer products have been declining for
several years as a result of computer product price reductions and intense
competition. Inacom has responded with leveraging operating expenses and with an
expansion of sales of higher margin computer services and communications
services. There can be no assurance that gross margins for computer products
will not continue to decline or that Inacom will be successful in controlling
operating costs. Furthermore, there can be no assurance that gross margins for
computer services and communications services will not also decline or that
Inacom will be able to successfully grow and compete in such service markets.
COMPETITION
All aspects of the technology management services industry are highly
competitive. Inacom's distribution network competes for potential clients,
including national accounts, with numerous other resellers and distributors.
Several computer manufacturers have expanded their channels of distribution,
pricing and product positioning and compete with Inacom's distribution network
for potential clients. Additionally, several computer manufacturers in recent
years lessened or eliminated requirements upon independent resellers to purchase
products from a single source resulting in "open sourcing" of their products;
previously, such manufacturers had typically required independent resellers
having contractual relationships with Inacom to purchase their products from
Inacom. Other competitors operate mail-order or discount stores offering clones
of major vendor products. Inacom also competes with other computer technology
sellers in the recruitment and retention of franchisees and independently-owned
resellers. Inacom competes in the computer services division with a large number
of service providers, including IBM through ISSC, Andersen Consulting, EDS and
Vanstar. Competition in the communications products and services division is
also intense, and includes entities which are also significant vendors of
Inacom, such as Lucent Technologies and AT&T. Certain competitors and
manufacturers are substantially larger than Inacom and may have greater
financial, technical, service and marketing resources. The level of future sales
and earnings achieved by Inacom in any period may be adversely affected by a
number of competitive factors, including an increase in direct sales by vendors
to independent resellers and/or clients and increased computer client preference
for mail-order or discount store purchases of clones of major vendor products.
ITEM 2. PROPERTIES.
The Company's principal executive and administrative operations are located
in approximately 102,000 square feet of commercial office space in Omaha,
Nebraska, which is under a lease expiring in February 2006.
The Company leases distribution and configuration facilities in Omaha,
Nebraska, the first with approximately 128,000 square feet under a lease
expiring in May 2003 and the second with 65,000 square feet under a lease
expiring in March 2007; a distribution and configuration facility in Swedesboro,
New Jersey, with approximately 203,000 square feet under a lease expiring in
April 2007; and a distribution and
9
configuration facility in Ontario, California, with approximately 179,000 square
feet under a lease expiring in July 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.
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 February 28, 1997 are listed
below in order of their length of service to the Company, together with their
ages and all Company positions and offices held by them.
NAME AGE POSITION
- ----------------------- --- ---------------------------------------------------------
Bill L. Fairfield 50 President and Chief Executive Officer
David C. Guenthner 47 Executive Vice President and Chief Financial Officer
Michael A. Steffan 45 President, Distribution and Operations and Secretary
Cris Freiwald 42 President, International Division
Robert A. Schultz 54 Group Executive, Information Systems Group
Larry Fazzini 49 Vice President of Corporate Resources
George DeSola 50 Group Executive, Technology Services Group and President,
Inacom Communications
Jeff Hartigan 54 Vice President and Chief Information Officer
Steven Ross 39 President, Reseller Division and Corporate Marketing
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.
DAVID C. GUENTHNER was named Executive Vice President and Chief Financial
Officer in November 1991. Prior to November 1991, Mr. Guenthner was Senior Vice
President of Finance and Chief Financial Officer for the Company.
MICHAEL A. STEFFAN was named President of Distribution and Operations in
December 1995. Mr. Steffan was responsible for the Reseller Division from
December 1994 to December 1995 in addition to his position as President of
Distribution and Operations, a position he had held since May 1993. Prior to May
1993, Mr. Steffan was Vice President of Corporate Development and Secretary for
the Company.
10
CRIS FREIWALD was named President of the International Division in November
1994. Mr. Freiwald was Vice President of Corporate Development from May 1993 to
November 1994. Prior to May 1993, Mr. Freiwald was Director of Business
Development.
ROBERT A. SCHULTZ was named Group Executive of the Information Systems Group
in December 1996. Prior to December 1996, Mr. Schultz was the President and
General Manager of Direct Operations, a position he has held since April 1994,
and the President and General Manager of Client Service Division, a position he
had held from January 1993 to December 1996. Mr. Schultz was responsible for
Direct Operations and the Advanced Systems and Services Group for the Company
from August 1991 to January 1993.
LARRY FAZZINI was named Vice President of Corporate Resources in February
1993 when he joined the Company. Prior to February 1993, Mr. Fazzini was the
Director of Human Resources for Sears Business Centers, Inc., a distributor of
information technology products and services.
GEORGE DESOLA was named Group Executive of the Technology Services Group in
December 1996 in addition to his position as President of Inacom Communications,
a position he has held since he joined the Company in March 1994. Mr. DeSola was
responsible for Corporate Marketing from December 1994 to December 1996 in
addition to his position as President of Inacom Communications. Prior to March
1994, Mr. DeSola was the Vice President of Marketing and Customer Service for
MCI Communications Corp., a telecommunications company.
JEFF HARTIGAN was named Vice President and Chief Information Officer in May
1995 when he joined the Company. Prior to May 1995, Mr. Hartigan was Vice
President of Information Services at Northern Telecommunications Inc. (NORTEL),
a telecommunications company.
STEVEN ROSS was named President of the Reseller Division and Corporate
Marketing in December 1996. Prior to December 1996, Mr. Ross was the President
of the Reseller Division, a position he has held since he joined the Company in
December 1995. Mr. Ross was Vice President of Sales and Business Development at
Intelligent Electronics Inc., a distributor of information technology products,
from September 1993 to November 1995. Prior to September 1993, Mr. Ross was the
Executive Vice President of Ultimate/Allerion Corp., an international systems
integrator company.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
RECENT SALES OF UNREGISTERED SECURITIES
During its 1996 fiscal year, the Company issued or agreed to issue shares of
its common stock, par value $.10 per share ("Common Stock") and its 6%
Subordinated Convertible Debentures due June 15, 2006 in the transactions
described below. The sales of the securities were exempt from registration under
Section 4(2) of the Securities Act of 1933 (the "1933 Act") for transactions not
involving a public offering, based on the fact that the private placements were
made to accredited investors and a limited number of nonaccredited investors
permitted under Rule 506 of Regulation D under the 1933 Act, and in the case of
the Debentures, to Qualified Institutional Investors (as defined in Rule 144A
under the 1933 Act).
On April 8, 1996, the Company acquired Technology Express, Inc., a Tennessee
corporation ("Technology Express"), and issued 89,286 shares of Common Stock to
the shareholder of Technology Express as part of the acquisition consideration.
On August 2, 1996, the Company acquired the assets of Computer Access
International, Inc., a Colorado corporation ("Computer Access"), and issued
238,209 shares of Common Stock to Computer Access and the shareholders of
Computer Access as part of the acquisition consideration.
On December 20, 1996, the Company acquired Networks, Inc., a Florida
corporation ("Networks"), and issued 90,910 shares of Common Stock to the
shareholders of Networks as acquisition consideration.
On December 20, 1996, the Company acquired Perigee Communications, Inc., a
Minnesota corporation ("Perigee"), and issued 272,726 shares of Common Stock to
the shareholders of Perigee as acquisition consideration.
On December 20, 1996, the Company acquired Gorham Clark, Inc., a New York
corporation ("Gorham Clark") for $10,294,721, and agreed to issue on January 5,
1998 and January 4, 1999, up to an aggregate of 122,278 shares of Common Stock
to the shareholders of Gorham Clark as contingent acquisition consideration.
On June 15, 1996, the Company issued $55,250,000 in aggregate principal
amount of its Debentures to Qualified Institutional Buyers. The Debentures are
convertible at the option of the holder into Common Stock at a conversion price
of $24.00 per share; an aggregate of 2,302,084 shares of Common Stock would be
issued if all Debentures were converted into Common Stock. The Debentures and
the underlying Common Stock were registered on Form S-3 for resales by the
holders on September 30, 1996.
Additional information required for Item 5 is included with the information
set forth under Item 8 below.
12
ITEM 6. SELECTED FINANCIAL DATA.
DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
Income statement data:
Revenue..................................... $ 3,102,055 $ 2,200,344 $ 1,800,539 $ 1,545,227 $ 1,014,466
Earnings (loss) before income taxes......... 31,719 19,833 (3,749) 19,693 17,959
Net earnings (loss)......................... 18,733 11,707 (2,256) 11,975 10,734
Earnings (loss) per share
-- primary................................ 1.76 1.14 (0.22) 1.26 1.25
-- fully diluted.......................... 1.64 1.14 (0.22) 1.26 1.25
Cash dividends per share.................... $ 0 $ 0 $ 0 $ 0 $ 0
Balance sheet data:
Working capital............................. $ 100,303 $ 90,940 $ 78,759 $ 67,936 $ 65,901
Total assets................................ 847,600 624,238 519,875 456,894 288,365
Long-term debt.............................. 55,250 23,667 30,333 20,000 36,800
Stockholders' equity........................ $ 176,830 $ 148,775 $ 135,590 $ 136,491 $ 101,275
Statistical information:
Revenue change versus prior year............ 41.0% 22.2% 16.5% 52.3% 49.1%
Earnings change versus prior year........... 60.0% 618.9% (118.8)% 11.6% 215.3%
Earnings (loss) as a percent of beginning
equity..................................... 12.6% 8.6% (1.7)% 11.8% 12.0%
Selling, general and administrative expenses
as a percent of gross margin............... 81.6% 83.1% 95.1% 83.3% 78.3%
Revenue per dollar of assets employed....... $ 3.66 $ 3.52 $ 3.46 $ 3.38 $ 3.52
Current ratio............................... 1.16:1 1.20:1 1.22:1 1.23:1 1.45:1
Long-term debt as a percent of long-term
debt and equity............................ 23.8% 13.7% 18.3% 12.8% 26.7%
Other Information:
Book value per share........................ $ 16.30 $ 14.85 $ 13.75 $ 13.92 $ 12.24
Common stock market prices:
High...................................... $ 39.25 $ 15.25 $ 21.00 $ 25.50 $ 14.75
Low....................................... $ 13.25 $ 7.00 $ 6.87 $ 12.75 $ 9.25
Approximate number of shareholders.......... 5,300 4,300 4,150 3,800 640
Weighted average shares outstanding
-- primary................................ 10,600 10,300 10,300 9,500 8,566
-- fully diluted.......................... 12,000 10,300 10,300 9,500 8,566
Number of employees at end of year.......... 2,874 2,196 1,884 1,883 1,309
Revenue dollars per employee based on end of
year employment............................ $ 1,080 $ 1,002 $ 956 $ 821 $ 775
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
1996 COMPARED TO 1995
BUSINESS COMBINATION AND NON-RECURRING CHARGES
In December 1996, the Company effected two business combinations accounted
for as poolings of interest transactions. The overall impact of the combinations
with relation to the financial statements taken as a whole are not material and
thus prior periods for the Company have not been restated to reflect the
business combinations. The Company recognized non-recurring charges of $1.7
million related to the business combinations during the fourth quarter of 1996.
The effect of the immaterial poolings was to increase stockholder's equity by
approximately $643,000.
REVENUE
The following tables set forth, for the indicated periods, revenue by
classification and the mix of revenue.
1996 1995 1996 1995
------------ ------------ ----------- -----------
(IN THOUSANDS)
Computer products..................................... $ 2,885,019 $ 2,047,215 93.0% 93.1%
Computer services..................................... 136,888 95,476 4.4 4.3
Communication products and services................... 80,148 57,653 2.6 2.6
------------ ------------ ----- -----
Total................................................. $ 3,102,055 $ 2,200,344 100.0% 100.0%
------------ ------------ ----- -----
------------ ------------ ----- -----
Revenues for 1996 increased $901.7 million or 41.0% to $3.1 billion when
comparing the fiscal year ended December 28, 1996 with the fiscal year ended
December 30, 1995. Revenue growth resulted primarily from computer product sales
which increased $837.8 million or 40.9% during 1996. Revenues from computer
services increased $41.4 million or 43.4% over 1995. Revenues from communication
products and services increased $22.5 million or 39.0% in 1996.
Revenues increased primarily as a result of an increase in products shipped
directly to the end-user customer, overall industry growth, the sale of products
to new independent resellers and the acquisitions completed by the Company-owned
business centers. The increase in revenues related to the acquisitions was
approximately $49.4 million for 1996. The increase in computer product sales
resulted from an increase in sales through the independent reseller channel
($563.5 million or 50.9% over 1995) and through an increase in sales through the
Company-owned business centers ($291.7 million or 29.4% over 1995). Revenues
from computer services increased as a result of increased sales efforts for such
service offerings and the inclusion of these services with increasing computer
product sales. Revenues from communication products and services increased as a
result of broad based growth from the communications product and service
offerings.
GROSS MARGIN
The following tables set forth, for the indicated periods, gross margin and
gross margin percentages by classification.
1996 1995 1996 1995
---------- ---------- ----------- -----------
(IN THOUSANDS)
Computer products........................................... $ 162,651 $ 122,386 5.6% 6.0%
Computer services........................................... 103,228 67,599 75.4 70.8
Communication products and services......................... 17,480 13,821 21.8 24.0
---------- ---------- --- ---
Total....................................................... $ 283,359 $ 203,806 9.1% 9.3%
---------- ---------- --- ---
---------- ---------- --- ---
14
The decrease in the Company's gross margin percentage for 1996 is primarily
a result of the decrease in the gross margin percentage on computer products,
which resulted primarily from a greater proportion of lower-margin independent
reseller channel sales in 1996 versus higher-margin computer product sales in
the Company-owned business centers.
The increase in gross margin percentage for computer services resulted from
an increase in the mix of services to include more higher-margin systems
integration services versus the support and technology procurement services. The
decrease in gross margin percentage for the communication products and services
resulted from an increase in mix of revenues which included more lower-margin
communications product sales as compared to the higher-margin long distance and
non-product services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $61.9 million
or 36.6% in 1996. SG&A as a percent of revenue was 7.5% in 1996 versus 7.7% in
1995. Excluding the impact of non-recurring charges recognized in the fourth
quarter of 1996, SG&A expenses increased $60.2 million or 35.6% in 1996. SG&A as
a percent of revenue, excluding the impact of the non-recurring charges
recognized in the fourth quarter of 1996, was 7.4% in 1996 versus 7.7% in 1995.
The increase in spending resulted primarily from the costs of handling the
increased product, services and communications revenues. The Company also
continued to invest in the infrastructure by opening a technology convergence
distribution and configuration center in Ontario, California, during the third
quarter of 1996. The Company incurred additional costs during the year related
to integrating the current year's acquisitions. The decrease in SG&A as a
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 1996 increased by $5.8 million to $20.4 million.
Interest expense increased due to higher average daily borrowings. Average daily
borrowings for 1996 were $114.4 million more than the average borrowings during
1995. The average daily borrowing interest rate decreased approximately 0.8
percentage points from 1995. The increase in the average daily borrowings
resulted from the Company's decision in the first quarter of 1996 to take
advantage of early pay discounts offered by some of the Company's major vendors
as well as an increase in accounts receivable and inventory. The increase in
accounts receivable was a result of an increase in sales. The decrease in the
average daily borrowing interest rate resulted from the Company selling $100
million of accounts receivable in June 1995 and the issuance of $55.25 million
of 6% convertible subordinated debentures in June 1996 (see "Financial Condition
and Liquidity").
NET EARNINGS
The following tables set forth, for the indicated periods, net earnings by
classification and mix of net earnings.
1996 (1) 1995 1996 (1) 1995
--------- --------- ----------- -----------
(IN THOUSANDS)
Computer products........................................... $ 9,703 $ 5,418 51.8% 46.3%
Computer services........................................... 7,381 5,272 39.4 45.0
Communication products and services......................... 1,649 1,017 8.8 8.7
--------- --------- ----- -----
Total....................................................... $ 18,733 $ 11,707 100.0% 100.0%
--------- --------- ----- -----
--------- --------- ----- -----
- ------------------------
(1) Includes the impact of $991,000 non-recurring charges recognized in the
fourth quarter of 1996.
15
Net earnings for 1996 increased 60% to $18.7 million, which included
non-recurring charges of $991,000, compared with net earnings of $11.7 million
for 1995. Share earnings increased to $1.64 per fully diluted share, which
included non-recurring charges of $0.09 per share, from the $1.14 per fully
diluted share reported for 1995. The increase resulted from the factors
discussed above.
1995 COMPARED TO 1994
REVENUE
The following tables sets forth, for the indicated periods, revenue by
classification and the mix of revenue.
1995 1994 1995 1994
------------ ------------ ----------- -----------
(IN THOUSANDS)
Computer products..................................... $ 2,047,215 $ 1,680,397 93.0% 93.3%
Computer services..................................... 95,476 85,406 4.3 4.7
Communication products and services................... 57,653 34,736 2.7 2.0
------------ ------------ ----- -----
Total................................................. $ 2,200,344 $ 1,800,539 100.0% 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. Revenues from the independent reseller channel increased as a
result of growth within the Company's existing reseller channel, an increase in
products shipped directly to the end-user and an increase in second source
revenue. Second source revenue is generated from sales to independent resellers
who are not Inacom resellers by contract. These revenues are primarily a result
of open sourcing 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.
Computer services revenue increased as a result of the increase in computer
product sales. Revenues from communication products and services increased as a
result of broad-based growth within the Company's communications division.
GROSS MARGINS
The following table sets forth, for the indicated periods, gross margin and
gross margin percentages by classification.
1995 1994 (1) 1995 1994 (1)
---------- ---------- ----------- ------------
(IN THOUSANDS)
Computer products........................................... $ 122,386 $ 113,797 6.0% 6.8%
Computer services........................................... 67,599 52,506 70.8 61.5
Communication products and services......................... 13,821 7,516 24.0 21.6
---------- ---------- --- ---
Total....................................................... $ 203,806 $ 173,819 9.3% 9.7%
---------- ---------- --- ---
---------- ---------- --- ---
- ------------------------
(1) The amounts for 1994 exclude the impact of the non-recurring charges
recognized in the second quarter of 1994.
16
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. Computer services margins increased $15.1 million or 28.7% to
$67.6 million during 1995 and the gross margin percentage, exclusive of
non-recurring charges recognized in the second quarter of 1994, increased 9.3
percentage points to 70.8% in 1995. Communications product and services margins
increased $6.3 million or 83.9% to $13.8 million during 1995 and the gross
margin percentage increased 2.4 percentage points to 24.0% in 1995. Computer
products margin was 60.1% of total 1995 gross margin versus 65.5% of total 1994
gross margin. Computer services gross margin was 33.2% of total 1995 gross
margin versus 30.2% of total 1994 gross margin. Communications products and
services gross margin was 6.7% of total 1995 gross margin versus 4.3% of total
1994 gross margin.
The increase in gross margin dollars for computer products was a result of
the increase in revenues. The decline in gross margin percentage for computer
products was a result of market pricing pressures related to open sourcing,
which began in the independent reseller channel during the second quarter of
1994, and an overall decline in hardware margins realized on end user sales. The
increase in gross margin dollars and gross margin percentage for computer
services resulted from the increased revenues and an increase in mix of services
revenues to include more higher margin systems integration services versus the
support and technology procurement services. The increase in gross margin
dollars and gross margin percentage for the communication products and services
was a result of the increased revenues and the increase in the mix of revenues
to include more higher margin long distance and services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses increased $8.9 million
or 5.6% to $169.3 million in 1995. As a percentage of 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 the average daily borrowing
interest rate. The Company's average daily borrowing interest rate for 1995
increased approximately 1.3 percentage points during the year while the average
daily borrowings decreased to $178.8 million in 1995 from $201.9 million in
1994.
17
NET EARNINGS
The following tables set forth, for the indicated periods, net earnings by
classification and mix of net earnings.
1995 1994 (1) 1995 1994 (1)
--------- ----------- ----------- -----------
(IN THOUSANDS)
Computer products............................................ $ 5,420 $ (659) 46.3% (33.9)%
Computer services............................................ 5,268 2,527 45.0 129.9
Communication products and services.......................... 1,019 77 8.7 4.0
--------- ----------- ----- -----
Total........................................................ $ 11,707 $ 1,945 100.0% 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.
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 included
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 included non-recurring charges of $.41 per share.
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 and a revolving credit facility for $40.0 million.
The $350.0 million working capital financing agreement, which is provided by
an unrelated financial services organization, expires June 29, 1998. At December
28, 1996, $100.8 million was outstanding under the working capital line and the
interest rate was 7.4% based on LIBOR. The working capital financing agreement
is secured by accounts receivable and 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
thereafter the Company may redeem the debentures at various premiums to
principal amount. The debentures may also be redeemed at the option of the
holder at any time prior to June 16, 2000 if there is a Change in Control (as
defined in the indenture) at a price equal to 100% of the principal amount plus
accrued interest at the date of redemption.
The Company entered into a revolving credit facility agreement in February
1996. The $40.0 million revolving credit facility agreement expires in February
1998. At December 28, 1996, $40.0 million was outstanding under the revolving
credit facility and the interest rate was 6.8% based on LIBOR. The revolving
credit facility is secured by accounts receivable and inventory.
The debt agreements contain certain restrictive covenants, including the
maintenance of minimum levels of working capital, tangible net worth,
limitations on incurring additional indebtedness and restrictions on the amount
of net loss 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 December 28, 1996 not restricted as to payment of cash
dividends under the most restrictive covenants in such agreements was
approximately $77.6 million. The Company was in compliance with the covenants
contained in the agreements at December 28, 1996.
18
Long-term debt was 23.8% of total long-term debt and equity at December 28,
1996 versus 13.7% at December 30, 1995. The increase was 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 offset by the payment
of $30.3 million of private placement notes previously held by unaffiliated
insurance companies.
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 December 28, 1996, $37.3 million of additional
accounts receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company receivables
have been substantially less than such additional amount. At December 28, 1996,
the implicit interest rate on the receivables sale transaction was 5.9%. On
January 13, 1997, the agreement was amended to sell an additional $100 million
of accounts receivable.
Operating activities used cash of $18.3 million in 1996 compared to cash
used by operating activities of $57.7 million in 1995. The primary factor
contributing to the change in cash used by operating activities was the net cash
provided by inventory and accounts payable. In 1996, inventory increased $31.8
million over 1995 with an offsetting increase in accounts payable of $71.1
million resulting in net cash provided from inventory and accounts payable of
$39.3 million. In 1995, inventory increased $124.3 million over 1994 with a
portion of the increase financed through a increase in accounts payable of
$105.1 million resulting in net cash used in inventory and accounts payable of
$19.2 million. The increase in cash provided by inventory and accounts payable
was primarily a result of an increase in inventory turns in addition to the
Company's efforts to match accounts payable terms better with inventory turns.
The net cash provided by inventory and accounts payable was primarily offset
by an increase in accounts receivable. Accounts receivable levels increased
$123.6 million due to the increased revenues.
The Company used $61.1 million in cash for investing activities. Cash of
$26.2 million was used to purchase fixtures and equipment and cash of $23.4
million was used for business combinations (See Notes to Consolidated Financial
Statements -- Business Combinations).
Net cash provided by financing for 1996 totaled $90.1 million, of which
$63.0 million was provided from notes payable and $55.25 million was provided
from the proceeds received from the sale of convertible subordinated debentures.
The financing proceeds were partially offset by $30.3 million in payments on
long-term borrowings.
The Company believes the funding expected to be generated from operations
and provided by the existing credit facilities will be sufficient to meet
working capital and capital investment needs in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company listed in the index
appearing under Items 14(a)(1) and (2) hereof are filed as part of this Annual
Report on Form 10-K and are incorporated
19
by reference in this Item 8. See also "Index to Financial Statements" on page 23
hereof. Certain quarterly financial data is set forth below.
DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS
FULLY STOCK
GROSS NET PER DILUTED MARKET PRICE
REVENUES MARGIN SHARE (2) SHARES HIGH LOW
---------- -------- --------- ------- ------ ------
NET
EARNINGS
(LOSS)
--------
1996
First........ $ 642,081 $ 57,181 $ 2,990 $0.29 10,300 $18.50 $13.25
Second....... 769,860 68,133 4,424 0.42 10,700 24.25 16.75
Third........ 769,452 73,127 5,041 0.43 12,800 35.88 15.38
Fourth....... 920,662 84,918 6,278(1) 0.50(1) 13,400 39.25 28.88
---------- -------- -------- --------- ------- ------ ------
Year....... $3,102,055 $283,359 $ 18,733(1) $1.64(1) 12,000 $39.25 $13.25
---------- -------- -------- --------- ------- ------ ------
---------- -------- -------- --------- ------- ------ ------
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
---------- -------- -------- --------- ------- ------ ------
---------- -------- -------- --------- ------- ------ ------
- ------------------------
(1) Includes a charge of $991,000 or $0.09 per share resulting from
non-recurring charges.
(2) Net earnings per share is calculated on a fully diluted basis.
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 February 28,
1997, the Company estimates there were 5,300 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.
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 22, 1997: Certain Stockholders; Election of Directors; Directors Meetings
and Compensation; Summary Compensation Table; Option Grants in Fiscal Year 1996;
Option Exercises in Fiscal 1996 and Fiscal Year-End Values; and Employment,
Consulting and Other Agreements.
20
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.
21
INDEPENDENT AUDITORS' REPORT
The Board of Directors
InaCom Corp.:
We have audited the accompanying consolidated financial statements of InaCom
Corp. and subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of InaCom Corp.
and subsidiaries at December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 28, 1996, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
[/S/KPMG PEAT MARWICK LLP]
KPMG Peat Marwick LLP
Omaha, Nebraska
February 21, 1997
22
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 28, 1996...................... 24
Consolidated Balance Sheets -- December 28, 1996 and December 30, 1995.................................. 25
Consolidated Statements of Stockholders' Equity -- Three-Year Period Ended December 28, 1996............ 26
Consolidated Statements of Cash Flows -- Three-Year Period Ended December 28, 1996...................... 27
Notes to Consolidated Financial Statements -- Three-Year Period Ended December 28, 1996................. 28 - 36
FINANCIAL STATEMENT SCHEDULE SUPPORTING CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE -- Valuation and Qualifying Accounts........................................................... 37
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.
23
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
----------- --------- ---------
Revenues:
Computer products............................................................................ $ 2,885,019 2,047,215 1,680,397
Computer services............................................................................ 136,888 95,476 85,406
Communications products and services......................................................... 80,148 57,653 34,736
----------- --------- ---------
3,102,055 2,200,344 1,800,539
----------- --------- ---------
Direct costs:
Computer products............................................................................ 2,722,368 1,924,829 1,571,700
Computer services............................................................................ 33,660 27,877 32,900
Communications products and services......................................................... 62,668 43,832 27,220
----------- --------- ---------
2,818,696 1,996,538 1,631,820
----------- --------- ---------
Gross margin............................................................................... 283,359 203,806 168,719
Selling, general and administrative expenses................................................... 231,235 169,338 160,437
----------- --------- ---------
Operating income........................................................................... 52,124 34,468 8,282
Interest expense............................................................................... 20,405 14,635 12,031
----------- --------- ---------
Earnings (loss) before income taxes........................................................ 31,719 19,833 (3,749)
Income tax expense (benefit)................................................................... 12,986 8,126 (1,493)
----------- --------- ---------
Net earnings (loss)........................................................................ $ 18,733 11,707 (2,256)
----------- --------- ---------
----------- --------- ---------
Earnings (loss) per share:
Primary...................................................................................... $ 1.76 1.14 (.22)
Fully diluted................................................................................ 1.64 1.14 (.22)
----------- --------- ---------
----------- --------- ---------
Common shares and equivalents outstanding:
Primary...................................................................................... 10,600 10,300 10,300
Fully diluted................................................................................ 12,000 10,300 10,300
----------- --------- ---------
----------- --------- ---------
See accompanying notes to consolidated financial statements.
24
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 30, 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1996 1995
----------- ---------
Current assets:
Cash and cash equivalents............................................................... $ 31,410 20,690
Accounts receivable, less allowance for doubtful accounts of $4,385 in 1996 and $3,537
in 1995................................................................................ 288,407 160,306
Deferred income taxes................................................................... 3,554 4,202
Inventories............................................................................. 386,592 352,948
Other current assets.................................................................... 2,335 1,794
----------- ---------
Total current assets................................................................ 712,298 539,940
----------- ---------
Property and equipment, at cost........................................................... 116,970 85,922
Less accumulated depreciation........................................................... 57,845 44,421
----------- ---------
Net property and equipment.......................................................... 59,125 41,501
----------- ---------
Other assets, net of accumulated amortization............................................. 27,531 17,831
Cost in excess of net assets of business acquired, net of accumulated amortization........ 48,646 24,966
----------- ---------
$ 847,600 624,238
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 406,753 331,221
Notes payable and current installments of long-term debt................................ 140,770 83,526
Income taxes payable.................................................................... 3,531 384
Other current liabilities............................................................... 60,941 33,869
----------- ---------
Total current liabilities........................................................... 611,995 449,000
----------- ---------
Long-term debt, excluding current installments............................................ 55,250 23,667
Other long-term liabilities............................................................... 73 --
Deferred income taxes..................................................................... 3,452 2,796
Stockholders' equity:
Capital stock:
Class A preferred stock of $1 par value. Authorized 1,000,000 shares; none issued..... -- --
Common stock of $.10 par value. Authorized 30,000,000 shares; issued 10,850,008 shares
in 1996 and 10,040,000 in 1995....................................................... 1,085 1,004
Additional paid-in capital.............................................................. 98,153 89,528
Retained earnings....................................................................... 77,607 58,874
----------- ---------
176,845 149,406
Less:
Cost of common shares in treasury of 19,989 in 1995................................... -- (161)
Unearned restricted stock............................................................. (15) (470)
----------- ---------
Total stockholders' equity.......................................................... 176,830 148,775
----------- ---------
Commitments and contingent liabilities....................................................
----------- ---------
$ 847,600 624,238
----------- ---------
----------- ---------
See accompanying notes to consolidated financial statements.
25
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL UNEARNED TOTAL
COMMON PAID-IN RETAINED TREASURY RESTRICTED STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK STOCK EQUITY
--------- ----------- ----------- ----------- ------------- ------------
Balance at December 25, 1993................. $ 1,004 88,928 49,423 (2,034) (830) 136,491
Net loss..................................... -- -- (2,256) -- -- (2,256)
Issuance of 3,400 treasury shares as director
compensation................................ -- 11 -- 30 -- 41
Issuance of 35,253 treasury shares under
stock option plans.......................... -- 209 -- 310 -- 519
Issuance of 16,800 treasury shares as stock
awards, net of forfeitures.................. -- 166 -- 161 468 795
--------- ----------- ----------- ----------- --- ------------
Balance at December 31, 1994................. 1,004 89,314 47,167 (1,533) (362) 135,590
Net earnings................................. -- -- 11,707 -- -- 11,707
Issuance of 4,400 treasury shares as director
compensation................................ -- (1) -- 39 -- 38
Issuance of 89,993 treasury shares under
stock option plans.......................... -- 240 -- 790 -- 1,030
Issuance of 61,800 treasury shares as stock
awards, net of forfeitures.................. -- (25) -- 543 (108) 410
--------- ----------- ----------- ----------- --- ------------
Balance at December 30, 1995................. 1,004 89,528 58,874 (161) (470) 148,775
Net earnings................................. -- -- 18,733 -- -- 18,733
Issuance of 691,131 shares in connection with
business combinations....................... 69 6,581 -- -- -- 6,650
Issuance of 132,966 treasury and common
shares under stock option plans............. 12 1,956 -- 161 -- 2,129
Issuance of 3,400 shares as director
compensation................................ -- 60 -- -- -- 60
Issuance of 2,500 shares as stock awards, net
of forfeitures.............................. -- 28 -- -- 455 483
--------- ----------- ----------- ----------- --- ------------
Balance at December 28, 1996................. $ 1,085 98,153 77,607 -- (15) 176,830
--------- ----------- ----------- ----------- --- ------------
--------- ----------- ----------- ----------- --- ------------
See accompanying notes to consolidated financial statements.
26
INACOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(AMOUNTS IN THOUSANDS)
1996 1995 1994
------------ ---------- ---------
Cash flows from operating activities:
Net earnings (loss)........................................................ $ 18,733 11,707 (2,256)
Adjustments to reconcile net earnings (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization............................................ 21,814 19,059 19,766
Changes in assets and liabilities, net of effects from business
combinations:
Accounts receivable.................................................... (123,648) (75,333) (22,496)
Inventories............................................................ (31,794) (124,296) (41,783)
Other current assets................................................... 97 (610) 463
Accounts payable....................................................... 71,162 105,100 122,961
Other liabilities...................................................... 20,896 5,444 5,983
Income taxes........................................................... 4,451 1,195 (2,192)
------------ ---------- ---------
Net cash provided (used) by operating activities..................... (18,289) (57,734) 80,446
------------ ---------- ---------
Cash flows from investing activities:
Additions to property and equipment........................................ (26,240) (10,346) (14,910)
Business combinations...................................................... (23,386) -- --
Payments from (advances of) notes receivable............................... 446 (1,872) 917
Other, including advances to affiliates.................................... (11,950) (1,051) (1,816)
------------ ---------- ---------
Net cash used in investing activities................................ (61,130) (13,269) (15,809)
------------ ---------- ---------
Cash flows from financing activities:
Principal payments on long-term debt....................................... (30,334) (6,667) --
Proceeds from receivables sold............................................. -- 100,000 --
Proceeds from (payments of) notes payable.................................. 63,094 (13,184) (81,314)
Proceeds from long-term debt............................................... 55,250 -- 17,000
Proceeds from the exercise of employee stock options....................... 2,129 1,030 519
------------ ---------- ---------
Net cash provided by (used in) financing activities.................. 90,139 81,179 (63,795)
------------ ---------- ---------
Net increase in cash and cash equivalents.................................... 10,720 10,176 842
Cash and cash equivalents, beginning of year................................. 20,690 10,514 9,672
------------ ---------- ---------
Cash and cash equivalents, end of year....................................... $ 31,410 20,690 10,514
------------ ---------- ---------
------------ ---------- ---------
See accompanying notes to consolidated financial statements.
27
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
The consolidated financial statements include the accounts of InaCom Corp.
(Company) and its wholly-owned subsidiaries. The Company is a leading provider
of management technology services which include technology procurement and
distribution of microcomputer systems, workstations, networking and
telecommunications equipment, systems integration and support services. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(B) ACCOUNTS RECEIVABLE
The Company entered into an agreement in June 1995 (which agreement was
amended and restated in August 1995) to sell $100 million of accounts
receivable, with limited recourse, to an unrelated financial institution. New
qualifying receivables are sold to the financial institution as collections
reduce previously sold receivables in order to maintain a balance of $100
million sold receivables. On December 28, 1996, $37.3 million of additional
accounts receivable were designated to offset potential obligations under
limited recourse provisions; however, historical losses on Company receivables
have been substantially less than such additional amount. At December 28, 1996,
the implicit interest rate on the receivable sale transaction was 5.9%. On
January 13, 1997, the agreement was amended to sell an additional $100 million
of accounts receivable.
(C) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of computer hardware, software, voice and data equipment and related
materials.
(D) OTHER ASSETS
Other assets include vendor authorization rights and long-term notes
receivable. Vendor authorization rights are being amortized over 10 years.
(E) COST IN EXCESS OF NET ASSETS OF BUSINESS ACQUIRED
The excess of the cost over the carrying value of assets of business
acquired is being amortized over 20 years. The Company assesses the
recoverability of intangible assets by determining whether the amortization of
the asset balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
(F) DEPRECIATION
Depreciation is provided over the estimated useful lives of the respective
assets ranging from 3 to 31 years using the straight-line method.
(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.
28
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) EARNINGS/(LOSS) PER COMMON SHARE
Primary earnings/(loss) per share of common stock have been computed on the
basis of the weighted average number of shares of common stock outstanding after
giving effect to equivalent common shares from dilutive stock options. Fully
diluted earnings/(loss) per share further assumes the conversion of the
Company's convertible subordinated debentures for the period they were
outstanding.
(I) REVENUE AND EXPENSE RECOGNITION
The Company recognizes revenue from product sales upon shipment to the
customer. Revenues from consulting and other services are recognized as the
Company performs the services. Revenues from maintenance and extended warranty
agreements are recognized ratably over the term of the agreement. Extended
warranty costs are accounted for on an accrual basis and are recognized under
the sales method.
(J) MARKETING DEVELOPMENT FUNDS
Primary vendors of the Company provide various incentives, in cash or credit
against obligations, for promoting and marketing their product offerings. The
funds or credits received are based on the purchases or sales of the vendor's
products and are earned through performance of specific marketing programs or
upon completion of objectives outlined by the vendors. Funds or credits earned
are applied to direct costs or selling, general and administrative expenses
depending on the objectives of the program. Funds or credits from the Company's
primary vendors typically range from 1% to 3% of purchases.
(K) RISKS AND UNCERTAINTIES
Financial instruments which potentially expose the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company sells product to a large number of customers in many different
industries and geographies. To minimize credit concentration risk, the Company
utilizes several financial services organizations which purchase accounts
receivable and perform ongoing credit evaluations of its customers' financial
conditions.
The Company's business is dependent in large measure upon its relationship
with key vendors since a substantial portion of the Company's revenue is derived
from the sales of the products of such key vendors. Termination of, or a
material change to the Company's agreements with these vendors, or a material
decrease in the level of marketing development programs offered by
manufacturers, or an insufficient or interrupted supply of vendors' product
would have a material adverse effect on the Company's business.
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(L) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash and cash equivalents, accounts receivable,
accounts payable and notes payable approximate fair value because of the short
maturity of these instruments. The fair values of each of the Company's
long-term debt instruments are based on the amount of future cash flows
associated with each instrument discounted using the Company's current borrowing
rate for similar debt instruments of comparable maturity. The estimated fair
value of the Company's long-term debt at December 28, 1996 approximates book
value.
29
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(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 COMBINATIONS
During 1996, the Company completed several acquisitions. In April 1996, the
Company acquired Technology Express, a network integrator in the Nashville,
Tennessee market for consideration of approximately $4.8 million in cash and
89,286 shares of common stock in a transaction accounted for as a purchase. The
excess purchase price over the estimated fair value of the net assets acquired
was $6.2 million and is being amortized using the straight-line method over 20
years.
In August 1996, the Company acquired Computer Access International for
consideration including approximately $7.6 million in cash and 238,209 shares of
common stock in a transaction accounted for as a purchase. The excess purchase
price over the estimated fair value of the net assets acquired was $8.0 million
and is being amortized using the straight line method over 20 years.
In December 1996, the Company acquired Gorham Clark, Inc., a network
consulting business in New York, New York for consideration of approximately
$12.0 million in cash in a transaction accounted for as a purchase. The Company
may also issue up to a maximum of 122,278 shares of common stock over the next
two years, contingent upon future results of the acquired business. The excess
purchase price over the estimated fair value of the net assets acquired was
$10.0 million and is being amortized using the straight-line method over 20
years.
In December 1996, the Company acquired all the issued and outstanding shares
of Perigee Communications Inc. of Minneapolis, Minnesota and Networks, Inc. of
Miami, Florida for 272,726 and 90,910 shares of common stock, respectively, in
transactions accounted for as "poolings of interest." The Company's consolidated
financial statements for the year ended December 28, 1996 include the fourth
fiscal quarters' activity for the acquired businesses. Prior period consolidated
financial statements were not restated as the results of operations would not
have been materially different than those previously reported by the Company.
The effect of the immaterial poolings was to increase stockholders' equity by
approximately $643,000.
If the above business combinations had occurred on December 26, 1993, the
pro forma operations of the Company would not have been materially different
than that reported in the accompanying consolidated statements of operations.
30
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
1996 1995
----------- ---------
Land, buildings and improvements....................................... $ 13,911 10,541
Furniture, fixtures and equipment...................................... 27,875 18,392
Computer equipment..................................................... 53,239 35,340
Computer parts held for repair and exchange............................ 21,945 21,649
----------- ---------
$ 116,970 85,922
----------- ---------
----------- ---------
(4) INCOME TAXES
Income tax expense (benefit) consists of the following:
1996 1995 1994
---------- --------- ---------
Current:
Federal....................................................... $ 10,195 6,151 487
State......................................................... 1,488 943 92
Deferred:
Federal....................................................... 1,209 897 (1,789)
State......................................................... 94 135 (283)
---------- --------- ---------
$ 12,986 8,126 (1,493)
---------- --------- ---------
---------- --------- ---------
The reconciliation of the statutory Federal income tax rate and the
effective tax rate are as follows:
1996 1995 1994
----------- ----------- -----------
Statutory Federal income tax rate................................ 35.0% 35.0% 34.0%
State income taxes, net of Federal benefit....................... 3.2 3.6 4.7
Other............................................................ 2.8 2.4 1.1
--- --- ---
41.0% 41.0% 39.8%
--- --- ---
--- --- ---
31
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE-YEAR PERIOD ENDED DECEMBER 28, 1996
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(4) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
1996 1995
--------- ---------
Deferred tax assets:
Valuation reserves....................................................... $ 5,726 3,324
Accrued expenses not deducted until paid................................. 2,188 1,275
Other.................................................................... -- 2
--------- ---------
Total deferred tax assets.............................................. 7,914 4,601
--------- ---------
Deferred tax liabilities:
Vendor discounts......................................................... 2,766 --
Depreciation............................................................. 4,241 2,725
Other.................................................................... 805 470
--------- ---------
Total deferred tax liabilities......................................... 7,812 3,195
--------- ---------
Net deferred tax assets................................................ $ 102 1,406
--------- ---------
--------- ---------
There was no valuation allowance for deferred tax assets at December 28,
1996 or December 30, 1995.
(5) NOTES PAYABLE AND LONG-TERM DEBT
The Company's primary sources of liquidity are provided through a working
capital financing agreement for $350.0 million, a revolving credit facility of
$40.0 million and convertible subordinated debentures of $55.25 million.
The $350.0 million working capital financing agreement, which is provided by
an unrelated financial services organization, expires June 29, 1998. At December
28, 1996, $100.8 million was outstanding under the working capital line and the
interest rate was 7.4% based on LIBOR. The working capital financing agreement
is secured by accounts receivable and inventories.
The Company entered into a revolving credit facility agreement in February
1996 with an unrelated financial institution. The $40.0 million revolving credit
facility agreement expires in February 1998. At December 28, 1996, $40.0 million
was outstanding under the revolving credit facility and the interest rate was
6.8% based on LIBOR. The revolving credit facility is secured by accounts
receivable and inventories.
The working capital financing agreement and the revolving credit facility
agreement contain certain restrictive covenants, including the maintenance of
minimum levels of working capital, tangible net worth, limitations on incurring
additional indebtedness and restrictions on the amount of net loss that the
Company can incur. The Company was in compliance with the covenants contained in
the agreements at December 28, 1996.
32
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(5) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
A summary of long-term debt follows:
1996 1995
---------- ---------
Private placement notes (a)....................................................... $ -- 30,334
Convertible subordinated debentures (b)........................................... 55,250 --
---------- ---------
Total long-term debt.......................................................... 55,250 30,334
Less current installments......................................................... -- 6,667
---------- ---------
Long-term debt, excluding current installments $ 55,250 23,667
---------- ---------
---------- ---------
- ------------------------
(a) The private placement notes were held by unaffiliated insurance companies.
The balances of the notes were paid in full in December 1996.
(b) In June 1996, the Company issued $55.25 million of 6.0% convertible
subordinated debentures due June 15, 2006. The debentures are convertible
into common stock of the Company at a conversion price of $24.00 per share,
subject to adjustments under certain circumstances, beginning on September
19, 1996. The debentures are not redeemable by the Company prior to June 16,
2000 and thereafter the Company may redeem the debentures at various
premiums to principal amount. The debentures may also be redeemed at the
option of the holder at any time prior to June 16, 2000 if there is a Change
in Control (as defined in the indenture) at a price equal to 100% of the
principal amount plus accrued interest at the date of redemption. The net
proceeds from the sale of the 6% debentures were used to reduce a portion of
the outstanding balance of the working capital financing agreement which
carried an interest rate at the time of the debenture sale of 7.3%.
(6) CREDIT ARRANGEMENTS
The Company has floor plan agreements to take advantage of vendor financing
programs. The agreements were secured by $122.7 million of the Company's
inventory at December 28, 1996 and $111.9 million at December 30, 1995. The
Company has entered into dealer working capital financing agreements with
several financial services organizations which purchase, primarily, accounts
receivable from the Company. The Company had contingent liabilities of $1.8
million at December 28, 1996 and $7.9 million at December 30, 1995 relating to
these agreements.
(7) LEASES
The Company operates in leased premises which include the general offices,
warehouse facilities and Company-owned branches. Operating lease terms range
from monthly to ten years and generally provide for renewal options.
Rent expense for operating leases was approximately $12.0 million, $9.8
million, and $8.6 million for the three years ended December 28, 1996,
respectively.
Future minimum operating lease obligations for the years 1997 through 2001
are $12.6 million, $10.6 million, $8.9 million, $6.6 million and $5.7 million,
respectively. It is anticipated that leases will be renewed or replaced as they
expire such that future lease obligations will approximate rent expense for
1996.
33
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(8) EMPLOYEE RETIREMENT BENEFIT PLAN
The Company maintains a qualified savings plan under Section 401(k) of the
Internal Revenue Code (IRC) which covers substantially all full-time employees.
Annual contributions to the qualified plan, based on participant's annual pay,
are made by the Company. Participants may also elect to make contributions to
the plan. Employee contributions are matched by the Company up to limits
prescribed by the IRC. Company contributions to the plan approximated $3.3
million in 1996, $2.4 million in 1995 and $1.8 million in 1994.
The Company maintains a nonqualified savings plan for employees whose
benefits under the qualified savings plans are reduced because of limitations
under Federal tax laws. Contributions made to this plan were not material.
(9) LITIGATION
The Company is involved in a limited number of legal actions. Management
believes that the ultimate resolution of all pending litigation will not have a
material adverse effect on the Company's consolidated financial statements.
(10) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and income taxes paid are summarized as follows:
1996 1995 1994
---------- --------- ---------
Interest paid........................................................... $ 19,611 14,054 12,599
Income taxes paid....................................................... 8,176 6,931 890
---------- --------- ---------
---------- --------- ---------
Components of cash used for acquisitions as reflected in the consolidated
statements of cash flows are summarized as follows:
1996
-----------
Fair value of assets acquired.............................................................. $ 41,965
Liabilities assumed........................................................................ (11,436)
Fair value of common stock issued.......................................................... (7,143)
-----------
Cash paid at closing, net of cash acquired............................................. $ 23,386
-----------
-----------
(11) STOCK OPTION AND AWARD PROGRAMS
The Company has two stock plans approved by the shareholders in 1994 and
1990, and a nonqualified stock option plan approved by shareholders in 1987.
Options granted under the stock plans may be either nonqualified or incentive
stock options. The option price, vesting period and term under the stock plans
and the nonqualified stock option plan are set by the Compensation Committee of
the Board of Directors of the Company. The option price may not be less than the
fair market value per share at the time the option is granted. The vesting
period of options granted typically ranges from 2 to 3 years, and the term of
any option granted may not exceed ten years. The stock plans also permit the
issuance of restricted or bonus stock awards by the Compensation Committee. At
December 28, 1996, the Company had approximately 80,000 shares available for
issuance pursuant to subsequent grants under the plans.
34
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(11) STOCK OPTION AND AWARD PROGRAMS (CONTINUED)
Additional information as to shares subject to options is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
OPTIONS PER OPTION PRICE
----------- ---------------- -----------
Options outstanding at December 25, 1993....................... 684,000 $5.85 to 19.75 13.73
Granted...................................................... 193,500 8.00 to 12.00 10.20
Exercised.................................................... (35,000) 7.25 to 14.62 11.74
Canceled..................................................... (42,000) 7.02 to 14.50 12.21
-----------
Options outstanding at December 31, 1994....................... 800,500 5.85 to 19.75 13.01
Granted...................................................... 157,000 9.56 to 14.69 9.82
Exercised.................................................... (90,000) 7.25 to 12.00 10.26
Canceled..................................................... (68,500) 5.85 to 14.63 12.45
-----------
Options outstanding at December 30, 1995....................... 799,000 5.85 to 19.75 12.76
Granted...................................................... 36,500 35.56 35.56
Exercised.................................................... (133,000) 5.85 to 14.63 10.77
Canceled..................................................... (21,000) 5.85 to 14.63 9.56
-----------
Options outstanding at December 28, 1996....................... 681,500 8.00 to 35.56 14.47
----------- ---------------- -----
----------- ---------------- -----
Exercisable at December 28, 1996............................... 428,000 $8.00 to 19.75 12.74
----------- ---------------- -----
----------- ---------------- -----
The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Accordingly, the Company has not recognized
compensation expense for its options granted in 1995 and 1996. In 1996, the
Company adopted FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. FASB Statement No. 123
also allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings and earnings per share disclosures for
employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in FASB Statement No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of FASB Statement No. 123.
The per share weighted-average fair value of stock options granted during
1996 and 1995 was $30.96 and $7.83, respectively, on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1996 -- expected dividend yield 0.0%, risk-free interest rate of
6.1%, expected volatility factor of 192.9%, and an expected life of 2.5 years;
1995 -- expected dividend yield 0.0%, risk-free interest rate of 5.7%, expected
volatility factor of 133.8%, and an expected life of 3.7 years.
Since the Company applies APB Opinion No. 25 in accounting for its plans, no
compensation cost has been recognized for its stock options in the consolidated
financial statements. Had the Company recorded compensation cost based on the
fair value at the grant date for its stock options under FASB Statement No. 123,
the Company's net earnings for 1996 and 1995 would have been reduced by
approximately 1.9%
35
INACOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(COLUMNAR DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
(11) STOCK OPTION AND AWARD PROGRAMS (CONTINUED)
and 0.6%, respectively, and the Company's earnings per share, fully diluted, for
1996 and 1995 would have been reduced by approximately 1.2% and 0.9%,
respectively.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under FASB Statement No. 123 is not reflected in the pro forma net earnings
amounts presented above, because compensation cost is reflected over the
options' vesting period of two and three years for the 1996 and 1995 options,
respectively. Compensation costs for options granted prior to January 1, 1995
are not considered.
36
SCHEDULE
INACOM CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
BALANCE AT CHARGED TO
BEGINNING COSTS AND AMOUNTS WRITTEN BALANCE AT END
OF PERIOD EXPENSES OFF (1) OF PERIOD
---------- ------------- --------------- ---------------
Fiscal year ended December 28, 1996 --
Allowance for doubtful accounts........................... $ 3,537 1,626 778 4,385
---------- ----- ----- -----
---------- ----- ----- -----
Fiscal year ended December 30, 1995 --
Allowance for doubtful accounts........................... $ 2,626 2,308 1,397 3,537
---------- ----- ----- -----
---------- ----- ----- -----
Fiscal year ended December 31, 1994 --
Allowance for doubtful accounts........................... $ 2,784 1,691 1,849 2,626
---------- ----- ----- -----
---------- ----- ----- -----
- ------------------------
(1) The deductions from reserves are net of recoveries.
37
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 27th day of March, 1997.
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 27th day of March, 1997.
/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
MOGENS C. BAY* Director
W. GRANT GREGORY* Director
JOSEPH INATOME* Director
RICK INATOME* Director
GARY SCHWENDIMAN* Director
DURWARD B. VARNER* Director
LINDA S. WILSON* 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
38
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 28, 1996.
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 Amendments to Inventory Working Capital Financing Agreement...................................... 41
4.3 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.
4.4 Amendments to Amended and Restated Receivable Purchase Agreement................................. 45
4.5 Indenture dated June 14, 1996 between the Company and First National Bank of Omaha, and related
debenture, with respect to the Company's convertible subordinated debentures, incorporated
herein by reference to the Company's quarterly report on Form 10-Q for the quarter ended June
29, 1996.
10.1 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.
10.2 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.
10.3 1994 Stock Plan of the Company, incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 26, 1994.
10.4 Executive Incentive Bonus Plan of the Company, incorporated herein by reference to Exhibit 10.7
to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996.
10.5 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.
10.6 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.
10.7 First Amendment to the Nonqualified Deferred Compensation Plan, incorporated herein by reference
to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December
28, 1996.
39
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----------
10.8 Rick Inatome Consulting Agreement, with amendment thereto, incorporated herein by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1996.
10.9 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.
10.10 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.
10.11 Form of Severance Benefit 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.
10.12 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.
10.13 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.................................................. 53
12 Statement re: Ratio of Earnings To Fixed Charges................................................. 54
21 Subsidiaries of the Company...................................................................... 55
23 Consent of KPMG Peat Marwick LLP................................................................. 56
24 Powers of Attorney............................................................................... 57
27 Financial Data Schedule.......................................................................... 65
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 10.1
through 10.12 above.
40